'««♦  Hate  stamped  below 


INTRODUCTION 


TO   THE 


Study  of  Fxonomics 


BY 

CHARLES   JESSE   BULLOCK,  PH.D. 

ASSISTANT   PROFESSOR   OK   ECONOMICS   IN    WILLIAMS  COLLEGE 
NFAV    EDITION,    REVISED   AND    ENLARGED 


SILVER,  BURDETT  AND   COMPANY 
New  York BOSTON Chicago 


Ctccq.    (SO  3 


Copyright,  1897, 
By  Silver,  Burdett  and  Company 

Copyright,  1900, 
By  Silver,  Burdett  and  Company 


2^5.1 


3?K 


PREFACE. 


This  work  is  designed  for  an  introductory  text-book 
of  economic  science.  The  first  three  chapters  aim  to 
familiarize  the  student  with  an  orderly  treatment  of 
some  leading  facts  in  the  economic  history  of  the 
United  States  before  the  study  of  economic  theory  is 
commenced.  Throughout  the  book  economic  principles 
arc  discussed  with  special  reference  to  American  con- 
ditions, and  their  workings  are  illustrated  by  frequent 
allusions  to  American  experience. 

Some  of  the  chapters  treat  of  topics  that  are  ex- 
tremely diflicult.  In  such  cases  no  attempt  has  been 
made  to  secure  a  false  appearance  of  simplicity.  The 
subject  of  public  finance  has  been  only  incidentally 
touched  upon.  The  author  considers  it  impossible  to 
discuss  taxation  satisfactorily  without  studying  public 
expenditures  also.  To  do  this  would  have  required 
more  space  than  could  be  allotted  to  that  subject. 

When  many  important  points  of  economic  theory  are 
unsettled,  as  is  certainly  the  case  at  the  present  time, 
the  preparation  of  a  text-book  is  not  an  easy  task.  The 
author  believes  that  it  is  neither  desirable  nor  pos- 
sible to  introduce  the  beginner  to  many  controversies 


4  PREFACE. 

on  fundamental  points  of  theory.  For  this  reason  he 
has  been  obliged  oftentimes  to  present  his  own  views 
much  more  dogmatically  than  he  would  desire  to  do 
under  other  circumstances.  On  practical  problems, 
however,  such  as  bimetallism  and  monopolies,  where 
weight  of  opinion  is  nearly  evenly  balanced,  every  effort 
has  been  made  to  present  both  sides  of  the  controversies. 
The  author  has  received  invaluable  assistance  in  the 
preparation  of  this  work.  Special  acknowledgment 
should  be  made  to  Professor  Charles  H.  Hull,  of  Cornell 
University,  to  whose  suggestions  and  criticisms  this 
book  owes  much  of  whatever  value  it  may  have.  The 
thanks  of  the  author  are  due  especially  to  his  wife,  who 
prepared  nearly  all  the  manuscript  for  the  printer,  light- 
ening by  one  half  the  labor  of  writing  this  work. 

CHARLES  JESSE   BULLOCK. 
Ithaca,  N.  Y.,  April,  1897. 

PREFACE   TO  THE   SECOND   EDITION. 

In  this  second  edition  the  greater  part  of  the  original 
work  remains  unchanged,  except  for  the  fact  that  at  a 
few  points  the  materials  have  been  brought  up  to  date. 
The  chapter  on  value,  however,  has  been  considerably 
altered,  and  the  sections  relating  to  normal  value  have 
been  entirely  rewritten.  Finally,  at  the  risk  of  length- 
ening the  book  unduly,  a  new  chapter  devoted  to  public 

expenditures  and  revenues  has  been  added. 

C.  J.  B. 
Wii.i.iamstown,  Mass.,  April,  1900. 


CONTENTS. 


CHAPTER   I. 

PAGB 

Introduction    to    the    Economic     History    of     the 

United   States 11 

I.    Westward  Expansion 11 

II.    Land  Tenures  in  the  United  States 14 

III.  Growth  of  Population  in  the  United  States       ...  18 

IV.  Systems  of  Labor  in  the  United  States         ,     .     .     .  22 
Literature  on  Chapter  I ...  30 


CHAPTER  II. 

The  Growth  of  Foundational  Industries      ....  32 

I.   The  Fur  Trade  and  Cattle  Raising 32 

II.    Agriculture 35 

III.   Fisheries  and  Mining 43 

Literature  on  Chapter  II 47 


CHAPTER  III. 

Manufactures  and  Transportation 48 

I.    Colonial  Manufactures 48 

II.    The  Industrial  Revolution  and  the  Factory  System   .  53 

III.    Transportation    .     .  58 


6  CONTENTS. 

PAGE 

IV.    Ship  Building 65 

V.    The  Textile  Industries 69 

VI.    Iron  and  Steel  Industries 74 

Literature  on  Chapter  III. 77 


CHAPTER  IV. 

The  Consumption  of  Wealth 79 

I.    Human  Wants 79 

II.    Economic  Goods 84 

III.  The  Consumption  of  Wealth 87 

IV.  Statistics  of  Consumption 99 

V.    Economy  in  Consumption.     Saving  and  Investment  .  101 

VI.    Demand 110 

Literature  on  Chapter  IV 1M 


CHAPTER  V. 

The  Production  of  Wealth 115 

I.    Production  in  General 115 

II.    The  Factors  of  Production 118 

Literature  on  Chapter  V 142 


CHAPTER  VI. 

The  Production  of  Wealth  {continued) 148 

I.    Organization  of  the  Factors  of  Production  ....  143 

H.    Stages  in  the  Developmenl  of  Production    ....  157 

III.  Freedom  in  the   Establishment  of  Productive  Ihider- 

takings 100 

IV.  Cost  of  Production 102 

V.   The  Invcsl  niriii  of  Labor  and  Capital  upon  Land      .  164 

VI.    Large-Scale  Production 170 

Literature  on  Chapter  VI 179 


CONTENTS.  7 
CHAPTER  VII. 

PAOK 

The  Theory  of  Exchange 180 

I.    Exchange  in  General 180 

II.  Value 183 

III.  Market  Value 186 

IV.  Normal  Value 194 

V.    Exceptions  to  the  Theory  of  Normal  Value  ....  2U9 

Literature  on  Chapter  VII 217 

CHAPTER  Vm. 

Money 218 

I.    Development  of  Metallic  Money      .......  218 

II.    The  Value  of  Metallic  Money 227 

III.  Debased  Money.     Gresham's  Law 242 

IV.  Inflation  and  Contraction 252 

V.    Government  Paper  Money 257 

Literature  on  Chapter  VHI 263 

■■  ' 

CHAPTER  IX.  i% 

Money  and  Credit 264 

I.    Credit  and  Instruments  of  Credit 264 

II.    Banks  as  Institutions  of  Credit 273 

III.  Advantages  and  Disadvantages  of  Credit      ....  278 

IV.  Territorial  Distribution  of  the  Precious  Metals      .     .  279 
V.    Summary  of  the  Theory  of  Money 282 

Literature  on  Chapter  IX. 287 

CHAPTER  X. 

Monetary  History  of   the  United    States.     Bimet- 
allism      288 

I.    Monetary  History  of  the  United  States 288 

n.    Bimetallism 297 

Literature  on  Chapter  X ...  308 


CONTENTS. 


CHAPTER  XI. 

PAGE 

Monopolies 309 

I.    The  Nature  of  Monopolies.     Monopoly  Value  .     .     .  309 

II.    Classes  of  Monopolies 313 

III.  General  Considerations  concerning  Modern  Monop- 

olies      318 

IV.  The  Problem  of  Natural  Monopolies 320 

V.    Capitalistic  Monopolies 325 

VI.    Final  Considerations  concerning  Monopolies     .     .     .  329 

Literature  on  Chapter  XI ....  336 


CHAPTER   XII. 

International  Trade 337 

I.    The  Foreign  Trade  of  the  United  States       ....  337 

II.    The  Nature  of  International  Commerce 339 

III.  International  Values 344 

IV.  Restriction  of  International  Trade 351 

Literature  on  Chapter  XII 374 


CHAPTER  XIII. 

The  Distribution  of  Wealth „     .     .  375 

I.     Social  Income 375 

II.    Private  Income 378 

III.  Primary  and  Secondary  Distribution 380 

IV.  General  Classification  of  Private  Incomes     ....  385 
V.    Interest 387 

VI.    Rent 399 

VII.    Wages 410 

VIII.    Profits 424 

Literature  on  Chapter  XTII 431 


CONTENTS. 


CHAITKIl  XIV. 

PACK 

The  Wages  System 432 

I.    General  Considerations  on  the  Labor  Contract      .     .  432 

II.    Labor  Laws  and  the  Labor  Contract 437 

III.  Labor  Organizations  and  the  Labor  Contract   .     .     .  440 

IV.  The  Unfavorable!  Relation  of  Laborers  to  the  Product 

of  their  Labor 44!) 

V.     Conciliation  and  Arbitration 453 

Literature  on  Chapter  XIV.  .     . 457 


CHAPTER  XV. 

Land  Nationalization.     Socialism 458 

I.    Land  Nationalization 458 

II.     Socialism 404 

Literature  on  Chapter  XV 477 

CHAPTER  XVI. 

The  Economic  Functions  of  Government 478 

I.    Economic  Functions  performed  by  Governments  .     .  478 
II.     Examination  of  Modern   Theories  of   Governmental 

Functions 182 

III.    The    Several    Functions   of   Government   considered 

from  the  Point  of  View  of  Individualism    .     .     .  4S8 

Literature  on  Chapter  XVI 102 

CHAPTER  XVII. 

Governmental  Expenditures  and  Revenues  ....  493 

I.    Public  Expenditures 493 

II.    Public  Revenues 49S 

III.    Taxation  in  the  United  States 514 

Literature  on  Chapter  XVII 551 


10  CONTENTS. 

PAOB 

BlBLIOGRAPnY 553 

I.    English  and  American  Works 553 

II.    Periodical  Literature 568 

III.    French  and  German  Works 569 

(1)  French  Works  on  Economics 569 

(2)  German  Works  on  Economics 570 

Index 573 


330-  B^- 
INTR0DUCTI0N  TO   ECONOMICS 

CHAPTER  I. 

INTRODUCTION   TO   THE   ECONOMIC   niSTORY   OP  THE 
UNITED   STATES. 

I.  Westward  Expansion. 

§  1.   The  English  colonies   in  North  America  were 
planted  on  the  mere  threshold  of  a  vast  territory  of  con 
tinental  extent  and  imperial  richness.     Re- 

Westward 

sistlcssly  the  line  of  settlement  has  been  movement  of 
pushed  westward  until,  at  the  present  day,  pop 
no  distinct  frontier  of  unsettled  land  exists  in  the 
United  States.  This  westward  expansion  of  population 
over  a  vast  area  of  free  land  has  been  the  fundamental 
fact  in  the  economic  history  of  the  country,  exerting  an 
influence  upon  almost  every  phase  of  its  economic  life. 

§  2.    The   colonists  of  the  seventeenth  century,  ad- 
vancing   through   the    valleys   of    the    rivers    flowing 
into  the  Atlantic,  pushed  their  settlements  The  first 
slightly  beyond  the  "fall  line,"  or  the  point  J^^SHm 
where  the  first  falls  obstructed  the  naviga-  expansion, 
tion   of  the    rivers.     The   frontier  of   the   seventeenth 
century  corresponded  roughly  with  the  western  border 
of  the  Atlantic  coast  region.     From  1700  to  17C0  the 


12      ECONOMIC  HISTORY  OF  THE  UNITED  STATES. 

frontier  was  advanced  another  stage  toward  the  west. 
Emigrants  gradually  followed  the  rivers  that  penetrate 
the  Appalachian  region,  and  formed  settlements  in  the 
table-lands  of  Pennsylvania,  Virginia,  and  the  Caro- 
linas.  In  New  York  and  New  England  many  settlers 
pushed  toward  the  interior  of  those  sections.  Mean- 
while, the  eastern  or  tide  water  regions  became  an  area 
of  more  or  less  continuous  settlement. 

§  3.   The  third  stage  in  the  advance  of  the  frontier 

occurred   between    1760     and    1790.      Settlers    moved 

_    ,_,  ,        through  the  valleys  and  mountain  passes  of 

The  third  °  J  r 

and  fourth  the  Appalachians,  and  emerged  in  Tennes- 
see,  and  Kentucky,  and  around  the  upper 
branches  of  the  Ohio  River.  Thus  the  frontier  passed 
over  the  mountains,  while  the  area  of  continuous  settle- 
ments advanced  well  into  the  Appalachian  region. 
With  the  Appalachian  mountains  once  passed,  emi- 
grants moved  rapidly  into  the  Mississippi  Valley.  In 
1820,  Ohio,  southern  Indiana  and  southern  Illinois, 
Tennessee,  Kentucky,  and  southeastern  Missouri  were 
included  within  the  settled  area.  West  of  the  Missis- 
sippi and  along  the  Great  Lakes,  a  fourth  region  of 
frontier  existed. 

§  4.   From  1820  to  1850  the  westward  movement  of 

population    was   very   rapid.     The  construction  of   the 

Erie   Canal,  in   1825,   and   the   use    of   the 

The  fifth 

and  sixth        steamboat   upon    the  western   rivers,  facili- 
tated  communication    with   the    East,   and 
stimulated  the  settlement  of  the  Mississippi  Valley.     By 
1850  the  frontier  was  advanced  to  the  eastern  boundary 


WESTWARD  EXPANSION.  13 

of  Kansas  and  Nebraska,  while  great  states  had  arisen 
east  of  the  Mississippi.  At  the  same  time  a  new  fron- 
tier of  settlement  was  begun  in  California,  Oregon,  and 
Utah.  By  1880  the  territory  intervening  between  the 
Kansas-Nebraska  and  the  Pacific  frontiers  of  1850  had 
become  populated,  although  somewhat  sparsely.  In 
many  places  frontier  conditions  still  existed,  but  areas 
of  thicker  settlement  had  so  broken  into  the  old  Rocky 
Mountain  frontier  that  a  distinct  line  of  frontier  no  longer 
existed.  The  decade  from  1880  to  1890  saw  almost  the 
complete  disappearance  of  an  "  American  frontier." 

§  5.  Up  to  the  present  time  the  economic  history  of 
the  United  States  has  been  marked  by  a  continual  west- 
ward movement  of  population  over  vacant  „.    ... 

1    L  Significance 

lands.  In  the  future  it  will  be  altogether  a  of  westward 
story  of  the  more  complete  development  of  P 
the  territory  won  for  the  cause  of  civilization  by  the 
labors  and  privations  of  the  American  pioneer.  The 
significance  of  this  movement  for  westward  expansion 
has  been  understood  by  few.  For  this  reason,  says 
Woodrow  Wilson,  "  the  history  of  the  country  and  the 
ambitions  of  its  people  have  been  deemed  both  sordid 
and  mean,  inspired  by  nothing  better  than  a  desire  for 
the  gross  comforts  of  material  abundance  ;  and  it  has 
been  pronounced  grotesque  that  mere  bigness  and 
wealth  should  be  put  forward  as  the  most  prominent 
grounds  for  the  boast  of  greatness.  The  obvious  fact 
is  that  for  the  creation  of  the  nation  the  conquest  of 
her  proper  territory  from  Nature  was  first  necessary; 
and  this  task,  which  is  hardly  yet  completed,  has  been 


14    ECONOMIC  HISTORY  OF  THE   UNITED  STATES. 

idealized  in  the  popular  mind.  A  bold  race  has  de- 
rived inspiration  from  the  size,  the  difficulty,  the  dan- 
ger of  the  task.  Expansion  has  meant  nationalization ; 
nationalization  has  meant  strength  and  elevation  of 
view." 

II.  Land  Tenures  in  the  United  States. 

§  6.    Systems  of  land  tenure  influence  powerfully  the 

economic   development  of   a   country.     In  Europe,  the 

The  urfiuence  possession    of    land    has     often    conferred 

of  land  economic    superiority    and    social    distinc- 

tenures. 

tion.  In  the  Middle  Ages  the  large  land- 
owners became  the  feudal  rulers  of  Europe,  while  the 
small  owners  and  the  landless  men  were  obliged  to 
place  themselves  under  the  protection  of  some  feudal 
lord,  in  a  position  of  economic  and  social  dependence. 
In  modern  Europe  the  landed  aristocracy  has  lost  most 
of  its  exclusive  political  privileges,  but  retains  something 
of  its  former  social  superiority.  Land  tenures  have  in 
most  countries  remained  aristocratic, — that  is,  such  as 
to  perpetuate  large  estates  and  to  make  difficult  the 
growth  of  a  large  number  of  small  holdings.  Such 
land  tenures  keep  the  mass  of  the  agricultural  popula- 
tion of  Europe  in  a  position  of  economic  dependence 
upon  the  land-owning  classes. 

In   the    United     States    economic    development    has 

taken  a  different   direction.     In   some   colonies   efforts 

Tenures  in      were   made   to   create   large   estates  whose 

the  united       proprietors    should  enjoy  special  privileges, 

SDBXGfli 

and  various  conditions  sometimes  made  it 
difficult  for  small  proprietors  to  acquire  titles  to  land. 


LAND   TENURES  IN   THE    UNITED  STATES,        lo 

But,  in  the  long  run,  the  tendency  was  toward  a  popu- 
lar system  of  land  tenure  and  land  transfer.  After  the 
Revolution,  practically  all  traces  of  aristocratic  laud 
laws  were  swept  from  the  statutes  of  the  states.  Small 
holdings  had  always  been  the  rule  in  New  England, 
while  large  estates  became  more  common  as  one  passed 
toward  the  South.  These  differences  had  an  economic 
explanation.  The  more  fertile  lands  of  the  middle  and 
southern  colonies  made  large  farms  and  plantations 
profitable  economically.  On  the  less  fertile  soils  of 
New  England,  smaller  farms  and  a  more  careful  cul- 
tivation were  an  economic  necessity.  Similar  causes 
explain  differences  in  agricultural  tenures  that  exist 
in  the  country  at  the  present  day. 

§  7.   Since  vacant  lands  abounded,  the   management 
and  settlement  of  such  public  lands  became  an  impor- 
tant   problem     early    in    colonial    history.  ^1^™!^^ 
The    usual    outcome    was   that   the   people  of  public 

~  lands. 

finally  secured  the  right  to  acquire  owner- 
ship of  the  vacant  territory  by  simple  methods  of  reg- 
istration, and   by  making   a  payment   that   was   often 
nominal.     The   growth   of   democracy  in  the   colonies 
made  such  a  solution  inevitable. 

The  War  for  Independence  placed  in  the  control  of 
the  United  States  nearly  all  the  territory  now  comprised 
within   its   limits  east  of  the   Mississippi.1  The  public 
The  territory  west  of   the  Alleghanics  was  domain  of  the 

J  ,  °  United  States. 

ceded   to  the   national   government   by  the 

1  On  the  subject  of  land  cessions,  see  maps  in  MacCoitn,  Historical 
Atlas;  Hinsdale,  The  Old  Northwest;  Gannett,  The  Building  of  a 
Nation. 


16    ECONOMIC  HISTORY  OF   THE    UNITED  STATES 

states,  and  became  a  public  domain.  In  1785  and  1787 
Congress  passed  ordinances  that  provided  for  the  ad- 
ministration of  the  Northwest  Territory.  These  ordi- 
nances laid  down  the  lines  which  the  policy  of  the  United 
States  has  always  followed,  in  many  important  features. 
The  lands  were  divided  by  a  governmental  survey  into 
townships  six  miles  square.1  Entire  townships  or  sec- 
tions of  townships  were  sold  at  public  sale  for  not  less 
than  a  dollar  per  acre.  This  system  enabled  settlers  to 
locate  easily  in  the  states  north  of  the  Ohio,  and  conse- 
quently the  flow  of  population  into  the  Ohio  Valley  was 
very  rapid.  By  several  acquisitions  the  United  States 
extended  its  territory  to  the  present  limits ;  and  the 
public  domain  included,  at  one  time  and  another, 
2,889,175  square  miles.2  The  thirteen  original  states, 
together  with  Maine,  Kentucky,  and  Texas,  were  never 
part  of  the  public  domain.  Their  area  is  about  699,000 
square  miles. 

This  vast  public  domain  has  been  sold  at  public  and 

at  private  sale  at  a  common  price  of  $1.25  to  $2.50  per 

acre.     Since  1862  a  free  homestead  of  not 

Disposal  of 

the  public  more  than  one  hundred  and  sixty  acres  has 
been  granted  practically  free  of  charge  to 
every  citizen  who  is  the  head  of  a  family,  or  above  the 
age  of  twenty-one,  on  condition  that  he  shall  actually 
cultivate  the  land  for  five  years.  Lands  valuable  for 
minerals,  for  timber  or  stone,  for  town  sites,  etc.  have 

1  See  Fiske,  Civil  Government,  81-88 ;  Hinsdale,  The  Old   North- 
west, 255-279. 

2  For  these  statistics  see  Donaldson,  The  Public  Domain,  10-14  ;  Sato, 
The  Land  Question,  21-77. 


LAND  TENURES  IN  THE   UNITED  STATES.       17 

/)ccn  sold  on  special  terms.     Vast  tracts  of  land  have 

been  given  away  for  the  purpose   of   assisting   in   the 

construction   of   railroads   and   military  roads,  for  the 

endowment  of  schools  and   colleges,   and  for   military 

bounties   to    soldiers   and   sailors.     In   these  ways  the 

larger  part  of  the  original  domain  has  passed  out  of 

the  hands  of  the  United  States.     In  1894,  exclusive  of 

Indian  and  military  reservations,  there  remained  about 

850,000  square  miles  of  public  domain.     To  this  should 

be  added  nearly  all  of  the  577,390  square  miles  included 

in  the  limits  of  the  territory  of  Alaska.     Of  the  lands 

that   remain,  only  a   small   part  will   be  available  for 

agricultural  purposes  until  the  arid  regions  of  the  West 

shall  be  irrigated. 

There  have  been  great  abuses  in  the  administration 

of  the  public  domain.     Vast  tracts  of   land  have  been 

secured  by  fraud,  railroads  and  other   cor- 

J  Result  of  the 

porations  have  secured  land  without  fulfill-  public  land 

ing  the  conditions  upon  which  the  grants  ^  cy' 
were  made,  while  land  and  timber  thieves  have  sup- 
ported lobbies  at  Washington  to  prevent  the  passage 
of  laws  designed  to  protect  public  interests.  Yet,  in 
spite  of  all  abuses,  millions  of  settlers  have  found 
homes  on  lands  secured  from  the  United  States,  the 
resources  of  the  country  have  been  developed,  and 
twenty-seven  states,  carved  out  of  the  public  domain, 
have  been  admitted  to  the  Union.  On  the  agricultural 
lands,  holdings  of  moderate  size  have  been  the  rule ;  and 
the  public-land  states  have  become  composed  of  a  large 
number  of  proprietors,  not  of  landlords  and  tenants. 

2 


18     ECONOMIC  HISTORY  OF  THE   UNITED  STATES. 

III.     Growth  of  Population  in  the  United  States. 
§  8.    During  the  seventeenth  century  the  population 
of   the  English  colonies   grew  quite   slowly,  but  from 

1700   to   1775   numbers   increased   rapidly. 
Statistics  of  .         . 

increase  of  Mr.  Bancroft  estimates  the  population  in 
population.  1754  at  l5l65?000  whites  and  263,000  ne- 
groes. In  1775  it  had  increased  to  2,500,000  souls. 
The  English  element  predominated  in  most  of  the  colo- 
nies at  that  time,  but  the  population  was  quite  hetero- 
geneous. In  New  York  the  Dutch  stock  prevailed,  on 
the  Delaware  River  there  were  settlements  of  Swedes,  in 
Pennsylvania  there  were  many  Germans,  in  the  moun- 
tainous districts  of  the  Appalachian  frontier  Scotch-Irish 
were  most  numerous,  while  the  southern  colonies  con- 
tained many  Huguenots.  The  First  Census  of  the 
United  States,  in  1790,  showed  the  population  to  be 
3,924,214.  The  subsequent  growth  of  the  country  is 
shown  in  the  following:  table  :  — 


Date 

Per  cent 

Number  of 

of 

Population. 

of 

inhabitants 

Census. 

increase. 

per  sq.  mile. 

1790 

3,929,214 

4.89 

1800 

5,308,483 

35.10 

6.61 

1810 

7,239,881 

36.38 

3.09 

1820 

9,033,822 

33.07 

4.76 

1830 

l'i.si  ;r,,n-_>n 

33.55 

6.35 

1840 

17,069,463 

32.67 

843 

1850 

28,191,876 

36.87 

7.93 

1860 

81,443,821 

35.58 

10.84 

1870 

38,558,871 

22.03 

13.80 

1880 

60  155,783 

30.08 

17.29 

1890 

62,622,250 

24.86 

21.31 

THE   GROWTH  OF  POPULATION.  19 

§  9.    The  enormous  increase  of  the  population  of  the 

United  States  during  the  last  century  is  due  partly  to 

natural    increase    bv   a   constant   excess    of 

J  Natural 

births  over  deaths.  From  1700  to  1820  increase  of 
the  natural  increase  was  very  great,  so  that  pop 
population  doubled  repeatedly  in  periods  of  about  twenty- 
live  years.  This  was  due  to  the  abundance  of  fertile 
land  which  was  usually  accessible  to  every  one.  Food, 
clothing,  and  shelter  could  be  secured  very  cheaply. 
An  increase  of  numbers  meant  not  so  much  an  increase 
of  mouths  to  be  fed,  as  an  addition  to  the  productive 
labor  of  each  family  employed  upon  new  land.  Under 
such  conditions  marriages  occurred  early,  families  were 
large,  and  the  natural  increase  of  numbers  was  rapid. 
After  1820  it  was  noticed  that  the  rate  of  natural 
increase  began  to  diminish.  This  became  apparent  in 
the  older  and  more  thickly  populated  regions.  In  recent 
times  this  condition  has  become  very  general,  as  the  pop- 
ulation of  more  states  has  become  relatively  dense.1 

§  10.  Immigration  has  been  so  large  that  the  smaller 
rate  of  natural  increase  has  been  less  apparent  than  it 
would  have  been  otherwise.  From  1790 
to  1820  immigration  was  small,  less  than 
250,000  persons  coming  to  this  country  during  that 
period.  Between  1820  and  1850  over  2,400,000  immi- 
grants arrived  on  our  shores,  and  as  many  more  came 

1  See  Tucker,  "Progress  of  the  United  States,"  89-107,  published  in 
1843,  for  a  discussion  of  the  decreased  rate  of  natural  increase.  Also 
read  Ma vo-S. Mini's  "  Statistics  and  Sociology,"  chaps,  v.,  vi.,  vii.,  and 
yiii. 


20    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

between  1850  and  1860.  In  the  latter  year  more  than 
thirteen  per  cent  of  the  total  population  was  estimated 
to  be  of  foreign  birth.  After  the  close  of  the  Civil 
War  immigration  assumed  larger  proportions  than  ever. 
The  West  welcomed  immigrants,  bureaus  were  estab- 
lished to  aid  them,  the  cost  of  ocean  and  land  trans- 
portation was  cheapened,  and  transportation  companies 
made  efforts  to  obtain  passengers  from  foreign  lands. 
In  1871,  321,350  immigrants  came  to  this  country ;  and 
in  1882,  788,992  arrived.  Since  then  the  annual  aver- 
age has  been  about  half  a  million.  The  whole  number 
of  immigrants  from  1820  to  1894  has  been  17,428,000. 
The  Census  of  1890  showed  that  the  population  of  the 
United  States  fell  into  the  following  groups  :  — 

Native-born  whites  with  native  parents   .     .  34,358,348 

Native-born  whites  with  foreign  parents      .  11,503,675 

Foreign-born  whites 9,121,867 

Colored  persons 7,638,360 

Formerly,  most  of  the  immigrants  came  from  Ireland, 
England,  and  Germany.  More  recently,  larger  num- 
bers have  come  from  the  Scandinavian  countries.  Dur- 
ing the  last  decade  immigration  from  Ireland  has  fallen 
off,  while  Austria-Hungary,  Poland,  and  Italy  have  sent 
vast  numbers  of  immigrants. 

§  11.   The  general  movement  of  population  has  always 

been  westward,  on  account  of  the  unoccupied  lands  of 

Mobility  of     the  frontier.     Not  only  immigrants,  but  also 

o^thTun^ed  many  °f  the  native  population,  have  formed 

states.  this    stream    of    westward    migration.     No 

other   country    o£    tbe    world   has   shown,   at   least   in 


THE    CllOWTII  OF  POPl'/.AriON. 


21 


modern  times,  an  equal  amount  of  internal  migration. 
This  mobility  of  population  lias  diminished  the  force 
of  all  economic  shocks.  In  1890  it  appeared  that  21.55 
per  cent  of  the  native-born  inhabitants  of  the  United 
States  were  living  in  a  different  state  from  that  in 
which  they  were  born.  In  1880  it  was  shown  that  only 
one  half  of  the  people  of  native  birth  were  living  in  the 
county  where  they  were  born. 

§  12.  In  progressive  countries  there  has  appeared,  in 
modern  times,  a  marked  tendency  of  the  population  ta 
concentrate  in  cities.  This  has  been  the  Growth  0f 
result  of  the  development  of  manufactures  cities- 
and  commerce,  and  of  the  improvement  of  transporta- 
tion facilities.  The  following  table  shows  the  growth  of 
that  portion  of  the  population  of  the  United  States 
which  lives  in  towns  and  cities  of  8,000  inhabitants 
and  over.  In  1790  the  number  of  such  towns  was  six, 
in  1890  it  was  four  hundred  and  forty-eight. 


Census  Years. 

Population 
of  the 

Population 
of 

Inhabitants  of 
Cities  in  each  100 

United  States. 

Cities. 

of  the 
Total  Population. 

1790 

3,929,214 

131,472 

3.35 

1800 

5,308,483 

210,873 

3.97 

1810 

7,239,881 

356,920 

4.93 

1820 

9,633,822 

475,135 

4.93 

1830       - 

12,866,020 

864,509 

6.72 

1840 

17,069,453 

1,453,994 

8.52 

1850 

23,191,876 

2,897,586 

12.49 

1860 

81,443,321 

5,072,256 

16.13 

1870 

38,558,371 

8,071,875 

20.93 

1880 

50,155,783 

11,318,647 

22.57 

1890 

62,622,250 

18,284,385 

29.20 

22     ECONOMIC  HISTORY   OF   THE   UNITED  STATES. 

A  comparison  of  different  sections  shows  more  striking 
results.  In  the  North  Atlantic  States  51.81  per  cent 
of  the  people  live  in  cities.  In  Massachusetts  and  New 
York  the  numerical  increase  of  the  urban  population  is 
larger  than  the  total  increase  of  the  population  of  the 
states,  so  that  there  has  been  an  actual  depopulation 
of  the  rural  districts.  This  concentration  of  the  popu- 
lation in  cities  is  greatest  in  all  the  states  where  manu- 
facturing and  commercial  interests  are  most  important. 

IV.   Systems  of  Labor  in  the  United  States. 

§  13.   In  the   original    colonies    there    was    a    great 

scarcity  of  laborers.     Small  proprietors  cultivated  their 

.     own   lands,   but   on   the  larger   farms   and 

Scarcity  of  '  & 

laborers  in      plantations   there  was  great  need  of  addi- 
tional laborers.     This   lack  was  intensified 
as   other    industries    grew   up   beside    agriculture.     To 
supply    this    need    immigration    was    encouraged,   and 
various  systems  of  obtaining  laborers  were  developed. 

§  14.  Indentured  white  servants  were  found  in 
all  the  colonies  at  an  early  date.  They  were  of  three 
indentured  classes.  The  first  and  principal  class  con- 
servants,  sisted  of  free  persons  who  desired  to  mi- 
grate to  the  colonics,  but  were  unable  to  pay  the 
expense  of  transportation  thither.  They  voluntarily 
contracted  with  some  one  in  America  to  place  their 
labor  at  his  disposal  for  a  term  of  years,  in  return  for 
his  assuming  the  expense  of  transporting  tbem  to  the 
colonies  and  supporting  them  during  the  stipulated 
terms  of  service.      The  second  class  was  made    up  of 


LABOR  SYSTEMS  IN  THE   UNITED  STATES.      23 

English  political  or  criminal  offenders,  whose  labor  was 
sold  for  a  term  of  years  or  fur  life.  The  third  and 
least  important  class  was  composed  of  persons  in  the 
colonies  who  were  sold  into  servitude  for  a  term  of 
years,  either  for  criminal  offenses  or  for  non-payment 
of  debts.  Sometimes  orphans  were  bound  out  to  service 
in  this  manner. 

This  system  of  indented  servitude  differed  very 
materially  from  slavery.  The  term  of  service  was 
usually  from  three  to  six  years.  At  its  character  of 
close  the  servant  was  entirely  free.  The  this system> 
rights  of  servants  under  the  contracts  were  usually 
safeguarded  fairly  well.  On  becoming  free,  servants 
often  rose  in  the  social  scale,  even  into  positions  of 
prominence.  Many  of  them  became  free  laborers,  but 
the  majority  became  landholders  and  swelled  the  number 
of  small  proprietors. 

Except  where  slavery  assumed  greater  importance, 
the  larger  part  of  the  laboring  class  of  the  colonies 
was  composed  of  servants.  In  the  eight-  ^aioithe 
ccnth  century  the  system  of  indented  serv-  system, 
itude  declined  in  the  southern  colonies,  yet  it  continued 
everywhere  until  the  Revolution,  when  further  impor- 
tations of  servants  from  England  became  impossible. 
Thus  the  supply  gradually  disappeared  by  expiration  of 
the  terms  of  service  ;  yet  indented  servants  were  found 
here  and  there  until  the  present  century,  when  the  sys- 
tem was  abolished  by  Law  in  some  states.  .This  class  of 
servants  had  been  an  important  addition  to  the  labor 
force  of   all    colonies    where  slavery  had  not  assumed 


24    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

greater  importance.     But  by  1780,  even  in  the  northern 

states,   the   system   was   less    profitable   to   employers, 

since  laborers  had  become  more  abundant  and  it  was 

less  desirable  to  hire  workmen  for  so  long  a  period  as 

six  years. 

§  15.  Slavery    differed    from    indented    servitude    in 

that  the  master  had  the  legal  right  of  ownership  of  the 

person  of  the  slave.     In  the  sixteenth  cen- 
Slavery. 

tury  various  European  nations  entered  upon 

the  African  slave  trade,  and  introduced  slaves  into  the 
New  World.  In  1619  a  Dutch  ship  landed  twenty 
African  slaves  in  Virginia,  and  soon  African  slavery 
Was  introduced  into  the  English  colonies.  The  English 
slave  trade  became  very  large,  and  the  government  fos- 
tered it,  forcing  negroes  upon  the  colonies  even  in 
opposition  to  protests  and  restrictive  legislation.  But 
the  profits  of  the  trade  were  so  large  that  the  colonists 
finally  entered  upon  it.  After  the  Revolution  various 
states  restricted  this  nefarious  traffic ;  and,  in  1807  and 
1808,  Congress  finally  abolished  it. 

English  and  American  traders  brought  thousands  of 

slaves  into  the  country  ;  while,  in  the  southern  colonies, 

__  „       the    negroes  multiplied  rapidly  by  natural 

Growth  of  &  L  i        J       J 

slavery  in  the  increase.  In  the  eighteenth  century  the 
importation  of  slaves  gradually  declined  in 
the  colonies  north  of  Maryland,  this  tendency  being 
most  marked  in  New  England.  After  the  Revolution 
slavery  was  gradually  abolished  in  the  northern  states. 
In  1790  the  distribution  of  slaves  among  the  states  was 
as  follows  :  — 


LABOR  SYSTEMS  IN  THE    UNITED  STATES.      25 

New  England  States       3,886 

New  York,  Pennsylvania,  and  New  Jersey    ....      36,484 
Southern  States 657,527 

697,897 

Up  to    this    time    the    course    of   the    institution    of 
slavery  had  been  shaped  mainly  by  economic  forces.     It 
is   incorrect,    however,   to    say  that   moral  causes  that 
considerations  had  nothing  to  do  with  the  ^story^ 
abolition  of   the  institution  in    the   North,  slavery, 
for   an    opposition    to  slavery    based   upon   moral   and 
religious   grounds  commenced  early    in  the   eighteenth 
century.      Moreover,    this    feeling    was    not    confined 
to   the   North,   but   was    shared    by   eminent   southern 
statesmen.     Said  Jefferson,  writing  concerning  slavery, 
"  I  tremble  for  my  country  when  I  reflect  that  God  is 
jii3t."     But  back  of  all  such  considerations  lay  the  fact 
that  slavery  had  never  been    profitable    in  the  North, 
and  that  in  the  South   it  had  enabled  the  slave-owners 
to  accumulate  much  wealth. 

Abolition,  therefore,  would  cost  the  northern  states 
little  ;  while,  in  the  southern  states,  it  would  destroy 
millions  of  dollars  of  property.  In  the 
South  the  demand  for  labor,  to  be  em- 
ployed in  raising  tobacco,  rice,  and  indigo,  caused  a 
rapid  increase  of  slavery.  In  the  North  smaller  hold- 
ings and  more  careful  cultivation  were  the  rule.  The 
careless  and  indolent  slave  was  wholly  unsuited  for 
such  work.  On  small  farms,  also,  overseers  could  not 
be  employed,  and  slave  labor  could  not  be  directed 
properly.  Finally,  the  expense  of  feeding  and  clothing 
slaves  was  much  larger  in   the  North,  while  the  mor- 


26    ECONOMIC  HISTORY  OF  TIIE   UNITED  STATES. 

tality  of  negroes  was  far  greater;    so  that  the  cost  of 
slave  labor  was  high  and  its  efficiency  was  low. 

The  result  of  slavery  was  to  divide  the  United  States 
into  two  groups  of  states,  —  one  dependent  upon  slave 
The  end  labor,  the  other  upon  free.  From  1790  to 
of  the  in-  I860  there  arose  a  bitter  sectionalism  based 
upon  these  differences.  Slavery  was  for- 
bidden in  the  Northwest  Territory,  and  the  great  states 
formed  in  that  region  entered  the  Union  as  free  states. 
Into  the  free  states  the  increasing  tide  of  immigration 
flowed,  population  increased  rapidly,  and  manufactures 
and  commerce  developed.  The  southern  states  received 
few  immigrants,  and  fell  behind  the  rest  of  the  country 
in  respect  to  the  growth  of  population  and  industries. 
By  1860  the  free  states  had  a  population  of  19,083,927 ; 
while  the  population  of  the  slave  states  was  only 
12,815,374,  of  which  number  3,953,696  were  slaves. 
The  invention  of  the  cotton  gin,  in  1792,  vastly  extended 
the  cultivation  of  cotton  in  the  South,  and  this  soon 
became  the  great  staple  crop  of  that  section.  Other 
branches  of  agriculture  were  neglected  in  order  that 
the  production  of  cotton  might  be  increased.  Slave 
labor  was  adequate  to  the  work  of  producing  large  crops 
of  cotton  by  wasteful  surface  culture  extended  con- 
stantly over  new  lands.  But  improved  agriculture  and 
mechanical  or  manufacturing  industries,  which  required 
more  efficient  labor,  could  not  be  undertaken  with  the 
labor  of  slaves.  So  the  South  was  shut  up  to  agricul 
tural  pursuits  that  tended  toward  the  gradual  impover- 
ishment  of  the   soil.     It   could   have   no   part   in   the 


LABOR  SYSTEMS  IN  THE   UNITED  STATES.      27 

economic  progress  of  the  nation,  and  remained  in  1860, 
as  it  had  been  in  1790,  exclusively  an  agricultural 
region.  Slavery  had  become,  therefore,  a  distinct 
impediment  to  the  economic  progress  of  the  South. 
The  abolition  of  the  institution  freed  that  section  from 
an  absolute  barrier  to  its  further  progress,  and  made 
possible  the  development,  by  free  labor,  of  the  manifold 
resources  of  the  New  South. 

§  16.  From  the  first,  free  laborers  existed  in  all  the 
colonies.  They  were  often  people  who  had  been  able 
to  pay  the  expense  of  their  passage  from  the 

Free  laborers. 

Old  World,  but  lacked  the  capital  or  the  en- 
terprise to  engage  in  some  industry  upon  their  own 
account.  Their  numbers  were  recruited  by  indentured 
servants  whose  terms  of  service  had  expired.  The  num- 
ber of  free  laborers  varied  greatly  in  the  different 
colonies,  but  it  was  largest  where  slavery  was  least 
general,  and  free  workers  were  not  brought  into  com- 
petition with  slaves.  In  the  northern  colonies  free 
laborers  increased  rapidly  during  the  last  half  of  the 
eighteenth  century.  John  Adams,  writing  in  1780,  says 
that  one  cause  of  the  opposition  to  slavery  in  Massachu- 
setts was  "  the  multiplication  of  laboring  white  people, 
who  would  no  longer  suffer  the  rich  to  employ  these 
sable  rivals  so  much  to  their  injury."  Alexander 
Hamilton,  writing  in  1791,  says:  "  There  are  large  dis- 
tricts which  may  be  considered  as  pretty  fully  peo- 
pled. ...  If  these  districts  have  not  already  reached 
the  point  at  which  the  complaint  of  scarcity  of  hands 
ceases,  they  are  not  remote  from  it." 


28    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

One  cause  of  the  scarcity  of  hired  laborers  was  the 
abundance  of  free  land.  Almost  any  one  could  become 
Effect  of  a  proprietor,  and  cultivate  the  soil  on  his 
free  land.  own  account.  The  land  was  usually  fertile, 
and  the  return  to  the  agriculturist  was  large.  These 
facts  made  it  necessary  for  an  employer  of  labor  to 
pay  wages  sufficiently  high  to  induce  people  to  work 
for  hire,  rather  than  to  secure  land  and  engage  in 
agriculture.  American  wages  have  felt  this  influence 
even  to  the  present  day.  Economists  have  found  one 
explanation  of  the  high  rates  of  wages  in  this  country 
in  these  two  facts  of  free  land  and  the  productivity  of 
American  agriculture.  The  elder  Winthrop  wrote  in 
1645,  "  Our  children's  children  will  hardly  see  this  great 
Continent  filled  with  people,  soe  that  our  servants  will 
still  desire  freedom  to  plant  for  themselves,  and  not 
stay  but  for  verie  great  wages."  In  1723,  a  leading 
royal  official  wrote  of  the  colony  of  New  York  :  "  North 
America  containing  a  vast  tract  of  land,  every  one  is 
able  to  procure  a  piece  of  land  at  an  inconsiderable  rate, 
and  therefore  is  fond  to  set  up  for  himself  rather  than 
work  for  hire.  This  makes  labor  continue  very  dear, 
a  common  laborer  usually  earning  3  shillings  by  the 
day  ;  and  consequently  any  undertaking  which  requires 
many  hands  must  be  undertaken  at  a  far  greater  ex- 
pense than  in  Europe,  and  too  often  this  charge  only 
overbalances  all  the  advantages  which  the  country 
naturally  affords,  and  is  hardest  to  overcome  to  make 
any  commodity  of  manufacture  profitable  which  can  be 
raised   in    Europe."      From  earliest   times   there  is  an 


LABOR  SYSTEMS  IN  THE    UNITED  STATES.       29 

abundance  of  evidence  to  show  that,  wages  have  been 
higher  in  the  United  States  than  in  European  countries. 
Within  the  last  decade  the  most  desirable  portions  of 
our  public  lands  have  been  occupied,  and  laborers  will 
have  more  difficulty  in  the  future  in  finding  an  outlet  in 
the  unsettled  regions  of  the  West. 

In  the  eighteenth  century  there  were  three  classes  of 
free  laborers.  First,  there  were  many  free  laborers  in 
the  northern  colonies  engaged  in  agriculture   m 

00  D  Classes  of 

or  in  domestic  service.     Such  laborers,  male  laborers  in 

,    n         ,  11     1  •      -1  1       j  1  the  colonies. 

and  female,  were  usually  hired  by  the  year, 
and  did  not  receive  the  highest  rates  of  wages.  In  the 
southern  colonies,  such  work  was  performed  by  slaves. 
The  second  class  of  laborers  comprised  those  engaged  in 
mechanical  or  manufacturing  pursuits,  or  in  trade  and 
commerce.  These  were  found  in  all  the  colonies,  since 
slave  labor  could  not  be  utilized  for  such  purposes. 
This  class  of  laborers  received  the  highest  wages  and 
was  always  in  demand,  since  the  supply  of  skilled 
workmen  was  always  inadequate.  The  third  class  was 
composed  of  unskilled  laborers  of  the  towns  and  villages. 
Their  wages  were  sometimes  high,  but  employment  was 
irregular  and  their  yearly  income  was  not  so  large. 

The  rapid  growth  of  population  during  the  present 
century  has  increased  the  number  of  laborers  who 
work  for  hire.     With  the  disappearance  of 

1  l  Labor  in  the 

indented  servitude,  free  laborers  formed  the  present 
only   class   of  workmen    in   the  North  and 
West.     The  abolition  of  slavery  gave  to  the  South  the 
advantages  of  free  labor. 


30    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 


LITERATURE   ON"  CHAPTER  I. 

On  Westward  Expansion:  Turner,  The  Significance  of  the 
Frontier  in  American  History;  Roosevelt,  Winning  of  the 
West,  especially  I.  101-133 ;  Roosevelt,  Thomas  H.  Benton, 
1-46 ;  Sumner,  Andrew  Jackson,  1-21 ;  Shaler,  Kentucky, 
53-120  ;  Carr,  Missouri,  1-13S ;  Smyth,  Tour  in  the  United 
States,  I.  178-183 ;  Wilson,  Division  and  Reunion,  2-7 ;  The 
Eleventh   Census  of  the  United  States,  Volume  on  Population, 

xvnr.-xxxvi. 

On  Land  Tenures  :  Maine,  Early  History  of  Institutions,  98- 
118;  Leslie,  Land  System  of  Ireland,  England,  and  Continental 
Europe ;  Pollock,  The  Land  Laws ;  Mill,  Political  Economy, 
Bk.  II.  Chaps.  6,  7,  8,  9,  10;  Jones,  Peasant  Rents;  Probyn, 
Systems  of  Land  Tenure ;  Cheyney,  Early  American  Land  Ten- 
ures ;  Cheyney,  The  Anti-Rent  Agitation  in  New  York ;  Egles- 
ton,  The  Land  System  of  the  New  England  Colonies ;  Doyle, 
The  English  Colonies  in  America;  Wef.den,  Social  and  Economic 
History  of  New  England;  Bruce,  Economic  History  of  Virginia; 
Willoughby,  Government  and  Administration  in  the  United 
States,  107-110;  Donaldson,  The  Public  Domain;  Sato,  His- 
tory of  the  Land  Question  in  the  United  States ;  Hinsdale,  The 
Old  Northwest  ;  Gannett,  The  Building  of  a  Nation;  Johnson's 
Universal  Cyclopaedia,  VIII.  359-360. 

On  the  Growth  of  Population :  Eleventh  Census  of  the 
United  States,  Volume  on  Population  ;  Bancroft,  History  of  the 
United  States,  I.  G02,  II.  389,390,  IV.  52;  Tucker,  Progress  of 
tin'  United  States;  Smith,  Statistics  and  Sociology;  Smith,  Emi- 
gration and  Immigration;  Whitney,  The  United  States,  Supple- 
ment, 1-25  ;  Gannett,  The  Building  id  a  Nation,  51-129;  Kf.t- 
tell,  "Immigration,"  injEighty  Years'  Progress,  I.  228-241;  The 
Statistical  Abstract  of  the  United  States,  1894,  I  and  5. 

On  the  Labor  System:  Waltershausen,  Die  Arbeits- 
Verfassung  der  Englischen  Kolonien  in  Nbrdamerika ;  Lodge, 
History  of  tin'  English  Colonies  in  America  ;  Doyle,  The  English 
Colonies  in  America;  Bancroft,  History  of  Hie  United  States; 


LITERATURE.  31 

Bruce,  Economic  History  of  Virginia;  Weeden,  Economic  and 
Social  History  of  New  England;  Wright,  Industrial  Evolution 
of  the  United  States;  Bali.acii,  White  Servitude  in  the  Colony 
of  Virginia;  Basset,  Slavery  and  Servitude  in  North  Carolina; 
Brackett,  The  Negro  in  Maryland;  Ingle,  The  Negro  in  the 
District  of  Columbia;  Tremain,  Slavery  in  the  District  of  Co- 
lumbia; Steiner,  History  of  Slavery  in  Connecticut;  Eighty 
Years'  Progress,  I.  103-122;  Moore,  History  of  Slavery  in  Massa- 
chusetts ;  Tucker,  Progress  of  the  United  States,  108-118;  Hins- 
dale, The  Old  Northwest,  345-367 ;  Ingle,  Southern  Sidelights; 
Lalor's  Cyclopaedia  of  Political  Science,  "  Slavery";  Kalm,  Trav- 
els into  North  America,  I.  303  ;  Oldmixon,  British  Empire  in 
North  America;  Ingram,  History  of  Slavery;  Mill,  Political 
Economy,  Bk.  II.  Chap.  V. ;  Roscher,  Political  Economy,  I.  207- 
234. 

Note.  —  Students  should  consult  the  maps  in  the  Eleventh 
United  States  Census  Report  on  Population,  pages  XII. -XXVIII., 
for  illustration  of  the  westward  movement  of  the  frontier. 


32     ECONOMIC  HISTORY  OF   TEE   UNITED  STATES. 


CHAPTER   II. 

THE   GROWTH   OP   FOUNDATIONAL   INDUSTRIES. 

I.  The  Fur  Trade  and  Cattle  Raising. 

§  17.    The  development  of  the  industries  of  the  United 

States   has   been   described   in   the   following   words : x 

"  The  United  States  lies  like  a  huge  page  in 

The  develop-  to     l    & 

mentofin-  the  history  of  society.  Line  by  line  as  we 
read  from  west  to  east  we  find  the  record  of 
social  evolution.  It  begins  with  the  Indian  and  the 
hunter  ;  it  goes  on  to  tell  of  the  disintegration  of  sav- 
agery by  the  entrance  of  the  trader,  the  pathfinder  of 
civilization  ;  we  read  the  annals  of  the  pastoral  stage  in 
ranch  life ;  the  exploitation  of  the  soil  by  the  raising 
of  unrotated  crops  of  corn  and  wheat  in  sparsely  settled 
farming  communities  ;  the  intensive  cultivation  of  the 
denser  farm  settlement ;  and  finally,  the  manufacturing 
organization  with  city  and  factory  system." 

§  18.    The  earliest  English  colonists  began  to  traffic 

with  the  Indians  for  peltry.     In  New  England  the  fur 

The  fur       trade   furnished   the   earliest   basis  for  the 

trade.  foreign  commerce  of  that  region.     In  New 

York    the   Dutch  and  the  English   fur  traders  pushed 

up  t lie  Hudson  River,  reaching,  through   the  Mohawk 

1  Turner,  Significance  of  the  Frontier  in  American  History. 


THE   FUR    TRADE.  33 

Valley,  the  Great  Lakes  and  the  Illinois  country.  In 
Virginia  the  traders  crossed  the  Alleglianies  by  the  close 
of  the  seventeenth  century,  and  later  explored  the  moun- 
tains of  Tennessee  and  the  Carolinas.  In  the  Caro- 
linas  the  colonists  began  at  an  early  date  to  compete 
with  the  Virginians  for  the  trade  with  the  Indians  of 
the  Southwest.  Meanwhile,  in  the  Mississippi  Valley, 
the  French  extended  their  traffic  with  the  Indians,  dot- 
ting the  interior  of  the  continent  with  their  trading 
posts,  For  the  control  of  this  valuable  trade  the  English 
and  French  contended  until  the  French  and  Indian  War 
wrested  this  territory  from  France. 

In  the  early   history  of   this   country  the  fur  trade 
was  important  because  it  furnished  a  valuable  industry 
which  aided  in  building  up  a  thriving  com-  ^am^f. 
merce.     But  more  than  this,  it  prepared  the  significance  of 

.  the  fur  trade. 

way  for  the  advance  of  civilization  across  the 
Appalachian  ranges.  The  fur  traders,  following  Indian 
trails,1  planted  the  first  posts  in  the  outlying  western 
wilderness.  In  their  track,  hunters  and  trappers  fol- 
lowed. As  numbers  grew  and  game  became  scarce, 
both  traders  and  hunters  moved  on  into  the  wilderness. 
Their  places  were  soon  taken  by  the  cattle  raiser,  and 
then  by  the  farmer ;  and  settled  communities  grew  up. 
The  trading  post,  therefore,  located  at  some  convenient 
place  along  an  Indian  trail  or  a  river  course,  became  the 
nucleus  of  a  new  area  of  settlement. - 

1  See  Roosevelt,  Winning  of  the  West,  i.  251,  314,  ii.  329  ;  Speed, 
The  Wilderness  Road ;  also  the  speech  by  Senator  Benton,  quoted  bjf 
Turner  iu  "The  Indian  Trade,"  72,  73. 


34    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

This  process  has  heen  repeated  at  each  step  in  the 
settlement  of  the  West.     After  the  Revolution,  the  set- 
tlers in  the  Mississippi  Valley  followed  the 

Later  history  r  '  J 

of  tie  fur       paths  marked  by  the  early  French  traders. 

New  Orleans  and  Mobile  were  the  centers  of 
the  Indian  trade  in  the  southern  part  of  the  Valley, 
while  the  region  of  the  Great  Lakes  was  the  seat  of 
perhaps  the  greatest  fur  trade  of  the  world.  From  Ohio 
to  Wisconsin  six  lines  of  rivers  furnished  water  routes 
from  the  Lakes  to  the  Mississippi.1  At  these  points 
old  trading  posts  rapidly  developed  into  important 
towns.  Beyond  the  Mississippi,  fur  traders  ascended  the 
Missouri,  penetrated  the  Rocky  Mountains,  and  guided 
the  earliest  exploring  expeditions  and  first  immigrant 
trains  through  the  mountain  passes  to  the  Pacific  coast. 
Of  this  trans-Mississippi  trade  St.  Louis  was  long  the 
center,  since  the  Missouri  River  gave  it  access  to  the 
entire  Northwest.  Along  this  route  the  Pacific  Fur 
Company  sought  to  establish  a  line  of  trading  posts  con- 
necting its  station  at  Astoria,  Oregon,  with  the  Mis- 
sissippi Valley.2 

§  19.    Cattle  grazing  has  often  been  a  special  industry 

in  the  United  States,  and  has  an  economic  significance 

catue         distinct  from  that  of  agriculture.     European 

raising,      cattle  were  imported  into  both  Spanish  and 

English  colonies  at  an  early  date.     In  Virginia  and  the 

Carolinas  cattle  raising  soon  became  distinctly  a  frontier 

1  See  Turner,  Character  of  the  Indian  Trade,   21 ;   Hinsdale,  Old 
Northwest,    first   map. 

a  Head  Washington  Irving,  Astoria. 


AGRICULTURE.  35 

industry.  Cattle  were  turned  loose  in  the  forests,  where 
they  multiplied  rapidly.  Advancing  settlements  pushed 
the  large  herds  of  cattle  westward,  where  vacant  lands 
abounded.  In  1770  Wynne  described  the  large  herds, 
often  numbering  one  thousand  cattle,  that  were  common 
in  the  Carolinas.  A  few  years  later  Smyth  gave  an 
account  of  cattle  raising  on  the  Carolina  frontier,  where 
vast  numbers  of  horses,  cattle,  sheep,  and  hogs  were 
turned  loose  in  the  forests  and  savannas.  Each  owner 
branded  his  cattle  with  a  brand  which  was  recorded  by 
the  clerk  of  the  county  court.  West  of  the  Alleghanies  the 
cattle  raisers  occupied  new  lands  some  time  in  advance  of 
the  coming  of  a  settled  agricultural  population.  Across 
the  Mississippi  the  same  process  has  been  repeated  ;  and, 
at  the  present  day,  cattle  raising  is  carried  on  as  a  separate 
industry  on  the  ranges  of  most  of  the  Western  States. 
It  has  gradually  declined  as  the  growth  of  a  farming 
population  has  diminished  the  land  available  for  grazing. 
In  1880  about  3,750,000  cattle  and  7,000,000  sheep 
remained  on  the  western  ranges. 

Hi.   Agriculture. 

§  20.  Agriculture  has  always  been  the  largest  single 
industry  of  the  United  States.  The  first  task  of  the 
American  settler  has  been  to  clear  away  the  production  of 
forests  and  bring  the  land  under  cultivation,  the  cereals. 
The  earliest  English  colonists  endeavored  to  raise  such 
crops  as  would  furnish  an  adequate  food  supply.  For 
this  purpose  maize,  or  Indian  corn,  proved  best  adapted. 
The  colonists  learned  from  the   Indians  how  to  plant 


36    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

this  hardy  cereal,  and  secured  large  crops  of  corn,  which 
became  their  most  important  article  of  food.  At  every 
stage  of  westward  migration  the  same  process  has  been 
repeated.  Before  the  forests  have  been  wholly  cleared, 
corn  has  been  sown  in  partial  clearings,  pumpkins  and 
beans  have  been  planted  in  the  same  patches  of  land,  and 
an  abundant  food  supply  has  been  secured.  When  the 
fertile  and  open  prairies  of  the  Mississippi  Valley  were 
reached,  the  production  of  corn  greatly  increased ;  and 
the  United  States  became  able  to  supply  large  amounts 
for  export.  In  1895  the  value  of  the  corn  and  corn  meal 
exported  from  this  country  was  $15,299,000.  In  that  year 
the  corn  crop  amounted  to  2,151,000,000  bushels,  and  its 
value  was  about  $567,000,000.  The  cultivation  of  wheat 
has  been  extended  continuously  since  the  early  days  of 
colonization,  although  Indian  corn  proved  a  more  reli- 
able crop  at  first.  Wheat  and  flour  were  exported  from 
the  middle  colonies  at  an  early  date,  and  at  the  close  of 
the  eighteenth  century  New  Jersey,  Pennsylvania,  and 
New  York  were  the  granary  of  the  United  States.  Early 
in  the  present  century  the  fertile  prairies  of  the  Ohio 
Valley  began  to  yield  large  amounts  of  wheat.  Between 
1830  and  1850  exports  of  wheat  and  flour  increased 
from  23,385,000  to  71,000,000  bushels.  The  culture 
of  wheat  has  moved  steadily  westward.  Minnesota, 
Nebraska,  Kansas,  and  the  Dakotas  now  form  the  gran- 
ary of  the  United  States.  Exports  of  wheat  amounted  to 
144,000,000  bushels  in  1895.  For  the  year  last  men- 
tioned the  wheat  crop  of  this  country  was  estimated  at 
467,000,000  bushels,  valued  at  $237,000,000.     For  a  lung 


AGRICULTURE.  37 

time  large  crops  of  oats,  barley,  rye,  mid  buckwheat  have 
been  raised  in  the  United  States,  and  the  oat  crop 
alone  approaches  in  value  the  corn  ami  wheat  crops.  In 
1895  this  country  produced  824,000,000  bushels  of  oats, 
valued  at  #163,000,000. 

§  21.  In  the  northern  portions  of  the  United  States, 
special  attention  has  been  given  to  the  grass  and  hay 
crop,  since  it  has  been  necessary  during  the 

1  .  Production 

long  winters  to  feed  live  stock  upon  hay  of  grass 
stored  up  in  the  summer  months.  In  New  andhay- 
England  and  some  of  the  middle  colonies  great  difficulty 
was  experienced  at  first  in  providing  sufficient  food  for 
live  stock  during  the  winter,  and  the  animals  often  died 
of  starvation.  Near  the  coast  a  scanty  supply  of  salt 
hay  was  secured  from  the  salt  marshes,  but  in  the 
thickly  wooded  regions  of  the  interior  even  this  resource 
was  lacking.  Hayiields  gradually  appeared  as  the  for- 
ests were  cleared,  but  the  quality  of  the  grass  was  usu- 
ally poor.  In  1750  timothy  grass  was  introduced,  and 
half  a  century  later  clover  began  to  be  generally  culti- 
vated. Since  then  the  quantity  and  quality  of  the  grass 
crop  has  steadily  improved.  In  the  prairies  of  the  Mis- 
sissippi Valley  no  such  difficulties  were  encountered  by 
the  settlers,  since  a  luxuriant  growth  of  grass  was  found 
in  those  regions.  At  the  present  day  grass  and  hay 
form  the  largest  crop  raised  in  the  country.  In  1895, 
after  our  pasture  lands  had  furnished  pasturage  during 
the  months  when  grazing  was  possible,  the  hay  crop  was 
valued  at  $393,000,000. 

§  22.    In  the  first  century  of  settlement  many  of  the 


38    ECONOMIC  HISTORY   OF   THE    UNITED  STATES. 

fruits  and  vegetables  known  in  Europe  were  introduced 
vegetables  mt°  tne  colonies.  Little  attention  was  paid 
and  fruits.  f-0  f]ie  development  of  fine  varieties  of  fruit 
until  the  present  century,  during  which  the  fruit  crops 
have  increased  constantly  in  importance.  The  cultiva- 
tion of  nearly  all  vegetables  has  been  very  widely  ex- 
tended, but  the  white  and  the  sweet  potato  have  formed 
the  most  important  crops,  furnishing  a  considerable  part 
of  the  food  supply  of  the  country.  In  1895  the  potato 
crop  was  valued  at  $78,000,000. 

§  23.    The  cultivation  of   flax    and   hemp  was  com- 
menced in  America  early  in  the   seventeenth  century, 
and  many  of  the  colonies  attempted  to  stim- 

Production 

of  vegetable     ulate  it  by  means  of  bounties.     The  entire 

hemp  crop  has  never  been  large,  however, 
and  it  has  diminished  for  the  last  thirty  years.  Ken- 
tucky and  a  few  states  of  the  Mississippi  Valley  produce 
about  all  the  hemp  raised  in  the  country  at  the  present 
time.  Flax  has  always  been  raised  in  larger  quantities, 
and  has  been  much  used  in  the  manufacture  of  home- 
spun cloth.  For  nearly  forty  years  the  flax  crop  has 
steadily  decreased  in  all  sections  except  the  states  of 
the  Mississippi  Valley.  The  production  of  cotton  was 
stimulated  between  1770  and  1790  by  the  invention  of 
improved  machinery  for  spinning  and  weaving  that  fiber. 
From  New  Jersey  to  Georgia  experiments  were  made  in 
cotton  culture ;  and  in  the  coast  regions  of  the  South 
Atlantic  States  a  very  fine  variety,  known  as  "sea  island 
cotton,"  was  developed.  On  the  uplands  in  the  interior 
there  was  raised  an  inferior  grade,  whose  uso  was  limited 


AGRICULTURE.  39 

by  the  fact  that  its  short  fibers  could  be  separated  from 
the  seeds  only  by  an  expensive  and  laborious  process. 
In  1792  Eli  Whitney  invented  a  cotton  gin  which  per- 
formed this  work  very  easily.  This  made  the  upland 
cotton  available  for  exportation  to  the  English  market, 
where  the  demand  was  rapidly  increasing.  Between 
1792  and  1800  the  cotton  exports  from  the  United  States 
increased  from  $30,000  to  $3,000,000,  and  by  1810  the 
crop  was  valued  at  $15,000,000.  Cotton  culture  was 
extended  rapidly  in  the  Gulf  States,  so  that  in  1859  the 
crop  was  valued  at  more  than  $200,000,000.  Most  of 
this  cotton  had  been  exported  to  England,  and  it  was  to 
the  planters  of  the  cotton  states  what  tobacco  had  been 
to  the  colony  of  Virginia.  Other  industries  had  been 
neglected  for  the  one  business  of  cotton  raising.  The 
extension  of  cotton  culture  made  slave  labor  very  profit- 
able to  the  planters,  and  fastened  the  institution  of  sla- 
very more  firmly  onto  the  economic  life  of  the  South. 
The  substitution  of  free  labor  for  slave,  since  the  Civil 
War,  placed  no  permanent  check  upon  the  cultivation  of 
.cotton.  In  1888  the  crop  amounted  to  3,438,000,000 
pounds,  valued  at  $292,000,000.  Texas,  Mississippi, 
Alabama,  and  Georgia  led  in  the  production  of  this 
great  staple  product. 

^  24.  About  1750  the  sugar  cane  was  introduced  into 
some  of  the  Gulf  States.  While  other  states  have  ex- 
perimented with  this  industry,  it  has  shown 

1  J '  Production  of 

constant    growth    in   Louisiana  only,  where  sugar,  rice, 

,       r    ,  i  .  -ii  i.    and  tobacco. 

most  or  the  crop  is  now  raised.     \\\  recent 

vcai's    sorghum   has   been   cultivated    in    a   number   of 


40     ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

states,  while  the  sugar  beet  has  been  introduced  in 
Nebraska  and  California.  But  the  entire  product  has 
furnished  only  a  small  part  of  the  sugar  consumed  in  the 
United  States.  Rice  has  been  produced  in  large  quanti- 
ties in  the  coast  districts  of  the  Carolinas,  Georgia,  and 
Florida.  Tobacco  has  always  been  an  important  crop 
in  certain  sections  of  the  country.  In  Virginia  and 
Maryland  it  early  became  the  principal  product.  A 
superior  quality  of  tobacco  could  be  raised  on  the  rich 
soils  of  those  colonies,  while  the  London  market  fur- 
nished a  constant  demand.  With  this  crop  the  planters 
of  those  colonies  paid  easily  for  large  quantities  of  man- 
ufactured supplies  imported  from  England.  For  two 
centuries  the  entire  economic  life  of  Virginia  centered 
around  the  production  of  tobacco  for  the  foreign  market. 
The  Middle  Atlantic  States  finally  commenced  the  cul- 
tivation of  tobacco,  and  it  has  extended  into  New  Eng- 
land and  the  Mississippi  Valley.  The  crop  has  always 
tended  to  exhaust  the  fertility  of  the  soil,  and  its  con- 
tinued cultivation  has  usually  made  it  necessary  to  resort 
constantly  to  new  lands.  In  1894  the  tobacco  crop  of 
the  United  States  was  valued  at  about  128,000,000. 
The  State  of  Kentucky  produced  more  than  one  third 
of  the  entire  crop. 

§  25.    Stock    raising     has    always     been   a   part    of 

American  agriculture,  and  live  stock  products  form  a 

other  impor-    lU()S^'  important  part  of  the  agricultural  prod- 

tant products.  uce  0f  the  country.     Millions  of  gallons  of 

milk    and    more    than   a  billion   pounds  of   butter   and 

cheese  are  furnished  by  the  dairies  each  year.     Plains, 


AGRicur/rt /;/■:. 


41 


bacon  and  lard,  live  cattle,  and  dressed  beef  are  ex- 
ported in  great  quantities  after  the  domestic  demand 
has  been  satisfied.  Wool  is  raised  in  large  amounts,  al- 
though a  considerable  part  of  our  entire  supply  has  been 
imported.  Poultry  and  eggs  are  other  important  products, 
whose  value  is  not  far  from  1200,000,000  annually. 

§  26.  Agriculture  in  the  United  States  has  been 
carried  on  chiefly  by  proprietors,  not  by  agricultural 
tenants.  The  result  of  popular  systems  of  Land 
land  tenure  has  been  that  we  "have  mil-  tenures, 
lions  of  farms  just  large  enough  to  profitably  employ  the 
labor  of  the  proprietor  and  his  growing  sons  ;  while  we 
have  also  multitudes  of  considerable  estates  upon  which 
labor  and  moneyed  capital,  live  stock,  and  improved 
machinery  are  employed  under  skilled  direction;  and  we 
have,  lastly,  those  vast  farms,  the  wonders  of  the  world, 
in  Illinois  and  California,  where  1,000  or  5,000  acres  are 
sown  as  one  field  of  wheat  or  corn  ;  or,  as  on  the  Dal- 
rymple  farms  in  Dakota,  where  a  brigade  of  six-horse 
reapers  go,  twenty  abreast,  to  cut  the  grain  that  waves 
before  the  eye  almost  to  the  horizon."  The  following 
statistics  from  the  Census  of  1890  show  the  character  of 
our  agricultural  tenures  :  — 


Year. 

Number  of 

Farms  cultivated 

by  Owner. 

Number  of 

Farms  rented 

for  Money. 

Number  of 

Farms  rented 

for  Share  of 

Products. 

1880 
1890 

2,984,306 
3,269,728 

322,357 
454,659 

702,244 
840,254 

42    ECONOMIC  HISTORY   OF   THE    UNITED  STATES. 

§  27.  The  most  striking  feature  of  American  agricul- 
ture has  been  that  an   abundance  of  fertile   land    has 

Extensive       encouraged  extensive  methods   of   farming. 

cultivation.  From  the  fertile  soil  of  new  fields,  large  crops 
have  been  raised  with  little  or  no  attempt  to  renew  or  to 
enrich  the  land.  When  in  this  manner  the  fertility  of 
one  field  has  been  exhausted,  another  has  been  brought 
into  cultivation.  In  older  countries,  where  land  is  scarce, 
a  more  careful,  intensive  form  of  cultivation  is  necessary  ; 
and  the  farmer  is  obliged  to  return  to  the  soil,  by  means 
of  fertilizers,  the  various  mineral  ingredients  that  are 
taken  from  it  by  each  year's  crops.  European  writers 
have  called  the  American  practice  "  wasteful,  wanton 
earth-butchery,"  and  have  criticised  Americans  for  per- 
sisting "  in  taking  up  fresh  land  instead  of  the  more 
costly  process  of  manuring  a  worn-out  soil."  But  it 
should  be  remembered  that  we  have  been  rich  in  fertile 
lands,  and  until  recent  times  poor  in  most  other  kinds 
of  wealth.  Our  extensive  agriculture  has  converted  a 
portion  of  the  natural  fertility  of  our  soils  into  other 
kinds  of  wealth  that  were  less  abundant.  In  the  older 
sections  of  the  country  intensive  cultivation  has  long 
been  practiced.  After  the  great  staple  crops  of  corn  and 
wheat  have  been  raised  for  successive  years  with  the 
smallest  expenditure  of  capital  and  labor,  the  soil  becomes 
perceptibly  impoverished;  and  the  production  of  grain 
moves  steadily  westward  toward  unoccupied  territory. 
Then,  on  the  older  lands  of  the  East  begins  a  more  care- 
ful, intensive  cultivation  of  smaller  crops,  vegetables, 
fruits,  or  grass   for  the  support  of  the  dairy.     On   the 


MIXING.  48 

better  portion  of  these  lands  cereal  crops  are  still  raised 
by  higher  cultivation,  while  the  poorer  soils  are  often 
allowed  to  revert  to  forest.  In  the  vicinity  of  towns  and 
cities  market-gardening  allows  a  still  more  intensive 
application  of  labor  and  capital.  On  the  newer  lands  of 
the  West  extensive  farming,  for  some  time  to  come,  may 
suffice  for  the  production  of  large  staple  crops ;  but  in 
most  parts  of  the  United  States  the  agriculturist  must, 
in  the  future,  resort  to  scientific  soil  cultivation.  In 
this  direction  much  has  been  done  already.  During  the 
present  century  experiments  and  innovations  have  rap- 
idly increased,  while  agricultural  societies  and.  publica- 
tions have  diffused  knowledge  of  improved  methods. 
In  the  invention  and  practical  use  of  agricultural  inachin 
ery  the  United  States  has  led  the  world. 

III.  Fisheries  and  Mining. 

§  28.  The  rivers  of  most  of  the  colonies  abounded  in 
fish,  but  New  England  possessed  sea  fisheries  that  formed 
the  basis  for  a  profitable  commerce  with  the 
West  Indies  and  with  Europe.  Thousands 
of  hardy  fishermen  pushed  their  voyages  as  far  as  the 
Banks  of  Newfoundland,  where  there  were  the  greatest 
sea  fisheries  of  the  world.  The  cod  fishery  has  been  the 
most  important  of  these,  although  the  whale  fishery 
enrolled  vessels  of  a  greater  tonnage  from  1840  to  1858. 
During  the  last  thirty  years  the  character  of  the  fishery 
interests  of  the  United  States  has  changed.  The  shore 
and  inland  fisheries  have  been  developed  into  greater 
commercial  importance  than  those  of  the  deep  sea.     In 


44     ECONOMIC  HISTORY  OF  THE    UNITED  STATES. 

1871  the  United  States  Fish  Commission  was  estab- 
lished. This  body  has  been  successful  in  propagating 
artificially  more  than  forty  kinds  of  fish.  In  1890  the 
value  of  the  fishery  products  of  the  country  was  over 
$42,000,000. 

§  29.   Iron  was  the  first  metal  to  be  produced  success- 
fully in  the  English  colonies.     By  1650  Massachusetts 

Mining  had  established  the  industry  of  smelting  iron 

industries.        frQm    the    «  bog.     ores  »  tfcat    were    found    in 

marshes  and  at  the  bottom  of  ponds.  The  iron  industry 
gradually  spread  through  the  other  colonies,  and  became 
especially  important  in  the  middle  colonies.  Pig  and 
bar  iron  were  exported  to  England  from  1718  to  the 
time  of  the  Revolution.  Copper  and  lead  were  mined 
in  small  quantities  in  some  of  the  colonies,  but  other 
attempts  at  mining  met  with  little  success.  In  the 
upper  Mississippi  region,  lead  was  mined  by  the  French 
and  Spanish  ;  but  the  vast  stores  of  mineral  wealth 
around  Lake  Superior  remained  untouched  by  European 
colonists. 

Early  in  this  century  gold  was  discovered  in  the  Caro- 

linas  and  Georgia,  where  about  124,000,000  worth  of  the 

Deveio  ment   ye^ow  metal  was  mined  up  to  1847.     Mean- 

of  mining:,      while  the  lead  mines  of  the  upper  Mississippi 

1800— I860. 

were  developed  quite  rapidly.  In  1820 
anthracite  coal  fairly  began  to  be  mined  in  Pennsyl- 
vania, and  the  coal  fields  of  that  state  began  to  be  opened 
up.  This  caused  a  rapid  expansion  of  the  iron  industry. 
About  1840  coal  was  first  used  in  smelting  pig  iron, 
and  the  production  of  iron  greatly  increased.     It  more 


MIXING. 


45 


than  doubled  between  1828  and  1842.  Smelting  by 
charcoal  still  continued,  however,  in  those  states  when; 
wood  was  abundant.  After  1830  geological  surveys 
were  established  in  many  states,  and  the  mineral 
resources  of  the  country  were  explored  more  systematic- 
ally. Between  1845  and  1850  copper  mining  was 
commenced  in  the  Lake  Superior  district.  The  copper 
product  of  the  country  increased  from  almost  nothing 
to  more  than  8,000  tons  in  1860.  Meanwhile  gold  had 
been  discovered  in  California,  and  the  gold  product  of 
the  United  States  increased  from  $889,000  in  1847  to 
$05,000,000  in  1853.  This  last  figure  was  nearly  five 
times  the  annual  product  of  the  world  from  1800  to 
1845.  Fifteen  years  later,  silver  was  discovered  in 
Nevada.  By  1860  the  mineral  resources  of  the  United 
State's  were  fairly  beginning  to  be  developed. 

Since  1860  the  growth  of  the  mining  industries  of  the 
country  has  been  constant.  The  output  of  coal  has 
increased  until  it   forms  the  most  valuable 

Mining 

mineral  product  of  the  United  States.  In  industries 
1894  the  statistics  of  the  production  of  coal  5UlceI8t)0 
were  as  follows  :  — 


Variety. 

Tons. 

Value  at  Mines. 

Bituminous      .... 

118,820,405 
46,358,144 

•$107,053,501 
78,488,063 

Pennsylvania  produced  practically  all  of  the  anthracite 
coal,  and  more  of  the  bituminous  than  any  other  state. 


46    ECONOMIC  HISTORY  OF  THE    UNITED  STATES. 

Iron  mining  has  advanced  as  steadily  as  coal  mining. 
The  output  of  iron  ore  increased  from  about  seven  mil- 
lion tons  in  1880  to  sixteen  million  tons  in  1890.  In 
1895  the  output  was  15,957,014  tons.  Michigan  pro- 
duces more  than  one  third  of  the  total  product,  while 
Alabama  now  produces  more  than  Pennsylvania.  Cop- 
per mining  has  developed  wonderfully.  The  Lake 
Superior  mines  have  now  been  equaled,  temporarily 
at  least,  by  those  of  Montana.  Lead  and  zinc  have 
been  mined  steadily,  Missouri  retaining  its  importance 
in  this  industry.  In  the  production  of  gold  and  silver 
the  United  States  has  held  a  position  of  great  impor- 
tance, although  within  recent  years  the  mines  of  Aus^ 
tralia  and  South  Africa  have  yielded  larger  amounts 
of  gold.  In  the  production  of  silver  this  country  has 
led  all  others.  While  it  is  impossible  to  mention  all 
the  mineral  products  of  the  country,  the  growth  of  the 
petroleum  industry  should  be  noted.  In  1889  the  prod- 
uct of  crude  petroleum  was  valued  at  nearly  twenty- 
seven  million  dollars.  In  1894  the  total  value  of  the 
crude  mineral  products  of  the  United  States  was  esti- 
mated to  be  more  than  five  hundred  million  dollars. 


LITERATURE.  41 


LITERATURE   ON    CHAPTER   II. 

On  the  Fur  Trade  :  TURNER,  Character  and  Influence  of  the 
Indian  Trade  in  Wisconsin  ;  Turner,  The  Significance  of  the 
Frontier  in  American  History,  89-92;  Weeden,  Economic  and 
Social  History  of  New  England ;  Beeh,  The  Commercial  Policy 
of  England  toward  the  American  Colonies,  57-02 ;  Eighty  Years' 
Progress,  II.  343-347;   Thwaites,  The  Colonies,  see  Index. 

On  Cattle  Raising :  Turner,  Significance  of  the  Frontier  in 
American  History,  92-93;  Bruce,  Economic  History  of  Virginia; 
Weeden,  Economic  and  Social  History  of  New  England;  Smyth, 
Tour  in  the  United  States,  I.  140-146,  II.  78-79  ;  Wynne,  British 
Empire  in  America,  II.  288;  Eighty  Years'  Progress,  I.  37-08; 
Tenth  Census,  III.  953-1116;  Nimmo,  Report  on  Range  and 
Ranch  Cattle  Business;  Salmon,  Report  on  the  History  and 
Condition  of  the  Sheep  Industry  in  the  United  States. 

On  Agriculture:  Weeden,  Economic  and  Social  History  of 
New  England;  Bruce,  Economic  History  of  Virginia;  Ramsay, 
History  of  South  Carolina,  II.  199-231 ;  Smyth,  Tour  in  the 
United  States,  I.  288-299,  II.  56-76, 110-140;  Eighty  Years'  Prog- 
ress, I.  19-131 ;  Bolles,  Industrial  History  of  the  United  States, 
1-181;  Ingle,  Southern  Sidelights,  47-00;  Shaler,  The  United 
States,  I.  375-416,  II.  54-57,  525-527,  017-021 ;  Whitney,  The 
United  States,  Part  IX. ;  Tenth  Census,  III.  p.  XXVIII.-XXXII1. ; 
Eleventh  Census,  Volume  on  Agriculture ;  Statistical  Abstract  of 
the  United  States,'  1895. 

On  Fisheries:  Weeden,  Economic  and  Social  History  of  New 
England  ;  Eighty  Years'  Progress,  II.  378  et  seq.  ;  Goode,  The 
Fisheries  and  the  Fishery  Industry  of  the  United  States;  Eleventh 
Census,  Report  on  Fisheries. 

On  Mining:  Weeden,  Economic  and  Social  History  of  New 
England;  Eighty  Years' Progress,  II.  17-170;  Swank,  History  of 
the  Manufacture  of  Iron  ;  Bolles,  Industrial  History  of  the  United 
States,  607-780;  Wright,  Industrial  Evolution  of  the  United 
States,  80-103;  Shaler,  The  United  States,  I.  417-484;  Whit- 
ney, The  United  States,  259-30S  ;  Report  upon  the  Production  of 
the  Precious  Metals;  Statistical  Abstract,  1895. 


48     ECONOMIC  HISTORY  OF  THE   UNITED  STATES. 


CHAPTER  III. 

MANUFACTURES   AND    TRANSPORTATION. 
I.   Colonial  Manufactures. 

§  30.  The  poverty  of  the  American  colonists  and 
their  remoteness  from  the  English  market  compelled 
Household  them  to  undertake  the  work  of  converting 
industries.  raw  materials  into  finished  products.  Many 
kinds  of  manufactures  had  their  beginning  within  the 
household.  Soap  making,  candle  making,  dressing  and 
manufacturing  leather,  the  work  of  the  carpenter  and 
the  smith,  spinning  yarn,  weaving  homespun  cloth,  mak- 
ing clothes. and  hats,  and  many  other  industries  were 
carried  on  within  the  family.  The  larger  farms  and 
plantations,  equipped  with  tool  houses,  forges,  grist 
mills,  and  saw  mills,  were  almost  self-sustaining  eco- 
nomic units.  This  lasted  until  the  close  of  the  eight- 
eenth century. 

§  31.  Yet,  even  in  the  early  days,  various  manufac- 
tures were  carried  on  for  commercial  purposes,  not  for 
Production  for  consumption  within  the  household.  Salt 
the  market.  an(j  jr0n  works  were  established  for  the 
purpose  of  supplying  the  domestic  market.  Brick  mak- 
ing, cordage  making,  tanning,  and  other  industries 
became  important  commercially.     Saw  mills  and  grist 


COLONIAL  MANUFACTURES.  49 

mills  were  run  for  public  as  well  as  domestic  supply. 
Thus  began  a  division  of  occupations,  which  was 
carried  further  when  increasing  numbers  of  artisans 
devoted  themselves  to  the  trades  of  the  blacksmith, 
carpenter,  wheelwright,  shoemaker,  cooper,  sawyer, 
shipwright,  bricklayer,  etc.  Such  workmen  performed 
much  work  that  had  been  done  formerly  upon  the 
farm. 

An  abundant  supply  of  timber  made  it  possible  to 
establish  various  manufactures  of  wood.  From  pipe- 
staves  and  clapboards  to  wagons  and  ships, 

1  °  *         Principal  man- 

many  of  the  colonies  supplied  the  domestic  uiacturing 

demand,  and  had  a  surplus  for  export.  The 
manufacture  of  iron  was  firmly  established  between 
1650  and  1750.  In  some  places  rolling  mills  converted 
the  iron  into  sheets  and  bars,  while  slitting  mills  cut  it 
into  rods.  Wrought-iron  nails,  household  utensils,  and 
many  kinds  of  tools  were  produced  ;  and  the  manu- 
facture of  arms  and  cannon  was  begun.  During  the 
Revolution  the  iron  industry  stood  the  country  in  good 
stead.  The  textile  industries  also  became  important. 
The  first  colonists,  with  spinning  wheel  and  hand  loom, 
began  to  spin  flax,  hemp,  cotton,  or  wool  into  yarn, 
and  to  weave  the  yarn  into  cloth.  Gradually  fulling 
mills  were  built,  where  homespun  fabrics  were  rolled 
and  pressed  in  hot  suds  and  fuller's  earth  in  order  to 
thicken  the  goods  and  increase  their  weight.  In  the 
eighteenth  century  a  number  of  factories  produced  cloth 
for  the  market.  The  colonists  probably  produced  three 
fourths  of  the  cloth   consumed   by   them.      The  finer 


50     ECONOMIC  HISTORY  OF  THE   UNITED  STATES. 

grades  of  cloths  were  always  imported  from  England* 
but  the  majority  of  the  people  depended  upon  the 
coarser  domestic  fabrics.  The  manufacture  of  cordage 
and  sail  cloth  was  an  important  auxiliary  of  the  ship- 
building industry.  Boots  and  shoes  were  important  in 
inter-colonial  trade  as  early  as  1700.  Lynn,  Massa- 
chusetts, was  a  center  for  this  branch  of  manufacture. 
Of  other  industries,  paper  making,  printing,  and  pub- 
lishing, and  the  manufacture  of  glass,  pottery,  and  hats 
were  the  most  important. 

§  32.  This  development  of  colonial  manufactures 
took  place  not  only  in  the  face  of  English  competition, 
The  attitude  but  m  sprtc  of  repeated  attempts  to  destroy 
of  England,  these  industries.  The  commercial  policy  of 
England  was  to  limit  the  colonies  to  the  production  of 
raw  materials  useful  to  English  manufacturers,  and  to 
reserve  the  colonial  market  exclusively  for  the  sale  of 
English  manufactured  products.  As  early  as  1699 
Parliament  prohibited  wool  or  manufactured  woolen 
goods  from  being  exported  from  any  of  the  colonics. 
In  1731  the  exportation  of  hats  was  prohibited,  and  the 
industry  was  placed  under  oppressive  restrictions.  In 
1751  Parliament  forbade  the  erection  of  new  iron  fur- 
naces, forges,  rolling  mills,  or  slitting  mills,  with  the 
purpose  of  restricting  the  colonies  to  the  production 
of  pig  and  bar  iron.  Although  these  restrictions  were 
evaded,  they  were  an  obstacle  to  the  development  of 
colonial  industries. 

§  33.   Manufactures   were   further   developed   in   the 
northern  colonies  than  in  the  southern,  where  the  energy 


COLONIAL  MANUFACTURES.  51 

of  the  people  was  occupied  with  the  cultivation  of  tobacco 
and  rice.  Even  in  the  northern  colonies,  fisheries,  ship 
building  and  commerce   with  the  West  In-  ^     .. 

°  Other  obsta- 

dics  absorbed  a  large  portion  of  the  available  ciestomanu- 
labor  and  capital.  Finally,  in  all  sections 
of  the  country,  scarcity  of  labor  and  high  wages  hin- 
dered manufacturing  enterprises.  The  high  rate  of 
American  wages  has  existed  since  the  earliest  times,1 
and  was  a  matter  of  record  as  early  as  1645.  It  was 
due  to  the  productiveness  of  labor  employed  upon  new 
land.  Laborers  would  not  enter  other  industries  un- 
less employers  oould  afford  to  pay  as  high  wages  as 
could  be  secured  in  agriculture.  An  industry  could  be 
established  only  when  the  superior  efficiency  of  labor,  or 
some  other  advantage,  enabled  the  employer  to  pay  the 
prevailing  high  wages. 

§  34.  Although  the  United  States  imported  from 
England  a  large  part  of  its  manufactured  supplies,  yet 
Alexander   Hamilton,   in  1791,   could  give  „    M   , 

o  Hamilton's 

the  following  account  of  American  man-  Report  on 
ufacturcs  :  2  "To  all  the  arguments  which 
are  brought  to  evince  the  impracticability  of  success  in 
manufacturing  establishments  in  the  United  States,  it 
might  have  been  a  sufficient  answer  to  have  referred  to 
the  experience  of  what  has  been  already  done.  It  is 
certain  that  several  important  branches  have  grown 
up  and  flourished  with    a  rapidity  which  surprises,  af- 

1  See  page  28. 

2  See  "  Report    on    Manufactures,"    in  Taussig,   State   Papers    and 
Speeches  on  the  Tariff,  48,  49. 


52    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

fording  an  encouraging  assurance  of  success  in  further 
attempts.  Of  these  it  may  not  be  improper  to  enumer- 
ate the  most  considerable."  These  were  in  substance  as 
follows  :  — 

1.  Leather,  shoes,  harness,  trunks,  gloves,  glue,  etc. 

2.  Irou  bars  and  sheets,  steel,  nail  rods  and  nails,  imple- 
ments of  husbandry,  artificers'  tools,  household  utensils, 
arms,  etc. 

3.  Ships,  cabinet  and  coopers'  wares,  wool  and  cotton 
cards,  machinery  for  manufactures  and  agriculture. 

4.  Manufactures  of  flax  and  hemp,  cables,  cordage,  sail- 
cloth, twine,  etc. 

5.  Bricks,  coarse  tiles,  and  potters'  wares. 

6.  Ardent  spirits  and  malt  liquors. 

7.  Writing  and  printing  paper,  wrapping  paper  and  paste- 
board, paper  hangings. 

8.  Hats  of  fur  and  wool. 

9.  Refined  sugars. 

10.  Oils,  soap,  tallow  candles. 

11.  Copper  and  brass  wares. 

12.  Tin  wares. 

13.  Carriages  of  all  kinds. 

14.  Snuff,  chewing  and  smoking  tobacco. 

15.  Starch  and  hair  powder. 

1G.    Lampblack  and  painters'  colors. 
17.    Gunpowder. 

"  Besides  manufactories  of  these  articles,  which  are 
carried  on  as  regular  trades,  and  have  attained  to  a  con- 
siderable degree  of  maturity,  there  is  a  vast  scene  of 
household  manufacturing,  which  contributes  more  largely 
to  the  supply  of  the  community  than  could  be  imagined 
without  having  made  it  an  object  of  particular  inquiry.'' 


THE  INDUSTRIAL  REVOLUTION.  53 

II.   The  Industrial  Revolution  and  the  Factory  System. 

§  35.  While  the  American  colonics  were  struggling 
for  independence,  there  began  in  England  a  series  of 
economic   changes  which   ultimately   trans- 

The  Industrial 
formed    completely    English    industry    and  Revolution 

commerce.     These  changes  constituted  the        nsland- 
Industrial   Revolution.      Between   1790   and   1850   the 
United  States  was  affected  by  the  same  influences.     For 
this  reason,  we  must  now  consider  briefly  the  course  of 
the  Industrial  Revolution* in  England. 

The  economic  condition  of  England  in  1760  was  prim- 
itive when  compared  with  the  present  order  of  things. 
Manufactures   were   carried    on   mainly  by 

J       J     English 

hand,  and  water  or  horse  power  was  seldom  manufacture? 
utilized.  The  woolen  industry  was  the  prin- 
cipal branch  of  manufacture,  the  iron  trade  coming  next 
in  importance,  while  manufactures  of  silk,  linen,  and  cot- 
ton were  much  smaller.  The  textile  industries  were 
carried  on  often  in  country  districts  in  combination  with 
agriculture.  The  men  of  a  household  attended  to  the 
farm,  while  the  women  and  children  spun  yarn  for  sale. 
Weaving  usually  occupied  the  men  during  the  winter. 
In  all  industries  the  tools  and  machinery  were  sim- 
ple, so  that  a  person  needed  but  little  capital  in  order  to 
become  an  independent  producer  and  the  employer  of  a 
few  journeymen  and  apprentices.  After  1740  the  iron 
trade  began  to  decline,  because  it  was  no  longer  possible 
to  secure  supplies  of  wood  sufficient  to  furnish  charcoal 
for  smelting  iron  ores. 


54    ECONOMIC    HISTORY  OF  THE    UNITED  STATES. 

In    1TG0    the   entire   foreign   commerce   of   England 

amounted   to  about  8120,000,000,  a  very  small  figure 

when  compared  with  the  development  of  the 
Commerce  and 
transportation  next  fifty  years.      Domestic  commerce  was 

restricted  by  the  difficulty  of  inland  trans- 
portation. Roads  were  very  bad,  while  the  construction 
of  canals  had  only  commenced.  London  was  the  only 
national  market,  where  products  of  all  sections  were  ex- 
changed ;  and  the  rest  of  the  domestic  commerce  was 
carried  on  through  a  few  local  markets,  through  annual 
fairs,  or  through  traveling  merchants. 

Labor  and  capital  were  hampered  by  many  restrictions. 
In  most  towns  industries  were  under  the  control  of  ex- 
Legai  position  elusive  guilds,  which  supervised  prices,  qual- 
°f  nar*1"1     ^  °^  g°°ds,  an^  many  details  of  busiiicss. 
1760.  In  such  towns  no  one  could  engage  in  any 

trade  without  becoming  a  member  of  the  guild,  and  serv- 
ing an  apprenticeship  of  seven  years.  Laborers  could  not 
move  from  one  parish  to  another,  unless  they  could  give 
guarantees  that  they  would  not  become  dependent  upon 
the  poor  rates  of  the  parish  in  which  they  settled.  They 
were  forbidden  to  form  associations  for  any  purpose, 
while  justices  of  the  peace  were  empowered  to  regulate 
wages.  Joint-stock  corporations  hardly  existed  in  any 
industries  except  banking,  insurance,  and  foreign  trade. 
Adam  Smith,  in  1776,  could  appeal  to  experience  to 
prove  that  such  companies,  whose  hired  managers  con- 
trolled other  people's  money,  would  generally  be  man- 
aged wastefully  and  negligently;  so  that  they  could  not 
compete  with  the  common  business  partnership. 


THE  INDUSTRIAL  REVOLUTION.  55 

Between  17G0  and  1840  English  industries  were  revo- 
lutionized. The  cause  of  this  was  a  remarkable  series  of 
inventions    which   affected   the   cotton   and 

Changes  in 
woolen  industries  first.     The  production  of    the  textile 

cotton  and  woolen  goods  had  long  been  hin- 
dered by  the  difficulty  of  supplying  weavers  with  enough 
yarn.  The  rude  hand  loom  could  weave  cloth  faster 
than  the  spinners  could  produce  yarn,  a  single  thread  at 
a  time,  upon  the  spinning  wheel.  Between  17G4  and 
1780  three  inventors,  Hargreaves,  Arkwright,  and 
Crompton,  perfected  appliances  which  finally  enabled  a 
spinner  to  spin  many  thousand  threads  of  yarn  at  once. 
These  inventions  enabled  spinners  to  produce  more  yarn 
than  the  clumsy  hand  looms  could  weave  into  cloth. 
But,  in  1785,  Cartwright  invented  a  power  loom  which, 
after  undergoing  improvements  for  many  years,  placed 
appliances  for  weaving  on  an  equality  with  the  machinery 
for  spinning.  Meanwhile,  James  Watt  had  invented  the 
steam  engine  in  1769.  Sixteen  years  later  it  began 
slowly  to  displace  water  power  in  running  the  new  spin- 
ning machinery.  These  inventions  first  revolutionized 
the  manufacture  of  cotton,  but  during  the  first  quarter  of 
the  present  century  all  textile  industries  were  affected 
by  them. 

The  steam  engine  was  first  used  in  coal  mines,  in  sink- 
ing shafts,  in  pumping  water  out  of  the  mines,  and  in 

hoisting   coal  from   the    pit.      In    this  wav 

°  .  .  Changes  in 

sufficient  supplies  of  coal  could  be  obtained     the  iron 

to  run  the  smelting  furnaces,  and  the  iron 

industry  was  stimulated  into  new  life.     By  the  use  of  t lie 


56    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

steam  engine  the  blast  furnace  was  great!}7  improved,  so 
that  the  production  of  iron  increased  rapidly. 

From  1755  to  1800  many  canals  were  constructed 
between  important  places,  with  the  result  of  cheapening 
changes  in  transportation.  Early  in  the  present  ccn- 
transportation.  turv  the  highways  of  England  were  greatly 
improved.  During  the  second  quarter  of  the  century 
railroad  construction  was  commenced,  and  the  steam 
engine  revolutionized  land  transportation.  By  1850  it 
had  been  applied  successfully  to  ocean  transportation. 

One  result  of  the  Industrial  Revolution  was  the  growth 
of  the  factory  system.  The  new  machinery  was  far  more 
expensive  than  the  old  hand  loom  or  spin- 
tne  factory  ning  wheel.  Consequently  the  ownership  of 
capital  tended  to  pass  out  of  the  hands  of 
the  laborers,  who  became  dependent  upon  capitalist 
employers  for  the  supplies  of  tools  and  materials  with 
which  they  worked.  Then  it  appeared  that,  in  order  to 
apply  water  or  steam  power  advantageously  in  operating 
the  new  machinery,  it  was  necessary  to  concentrate  a 
number  of  machines  in  the  same  building.  Moreover,  as 
the  product  of  an  establishment  increased,  the  processes 
of  manufacture  could  be  divided  more  profitably  among 
different  classes  of  laborers.  This  fact  necessitated 
more  thorough  superintendence  and  organization.  Such 
causes  led  to  the  gradual  concentration  of  industry  in 
large  factories,  and  to  the  disappearance  of  the  small 
establishments  of  the  domestic  producers. 

In  a  period  of  such  rapid  growth  and  change,  the  old 
restrictions  on  the  establishment  of  industries  and  the 


THE   INDUSTRIAL   REVOLUTION.  57 

regulation  of  prices  and  wages  could  not  be  maintained. 
More  and  more  these  laws  and  customs  fell  changed 

.  ,.  ,  .     ,.    ,  ,  .    .  condltionsof 

into  disuse,  and  capitalists  and  laborers  were  labor  and 
left  free  to  establish  new  enterprises,  and  to  capital- 
arrange  their  respective  interests  by  a  contract  which 
was  nominally  free.  Competition  became  the  ruling 
economic  force,  and  regulation  by  law  was  given  up  for 
the  time.  One  of  the  most  important  results  of  the  In- 
dustrial Revolution  was  the  destruction  of  mediaeval 
restrictions  upon  competition,  and  the  abandonment  of 
prices  and  wages  to  determination  by  the  contracts  of  the 
competing  parties. 

§  36.  In  1789  agriculture  and  commerce  were  the 
principal  industries  of  the  United  States,  although  do- 
mestic manufactures  had  been  established.  The  industrial 
There  appeared  here  and  there  a  desire  to  ^e^gU^?d 
promote  the  rapid  growth  of  manufactures,  states. 
in  order  that  the  country  need  not  depend  upon  England 
for  manufactured  goods.  Largely  from  a  desire  for  what 
was  termed  "  industrial  independence,"  attempts  were 
made  to  foster  manufactures.  In  this  effort  a  great 
obstacle  was  encountered.  England  possessed  the  in- 
ventions that  were  revolutionizing  industry,  while  with- 
out such  appliances  it  would  have  been  hopeless  for 
Americans  to  attempt  to  compete  with  the  manufac- 
turers of  the  mother  country.  But  England  intended 
to  retain  the  United  States  as  a  market  for  her  manu- 
factured products,  and  did  not  intend  to  allow  the  new 
inventions  to  be  used  outside  of  her  own  borders.  Strin- 
gent laws  prohibited  the  exportation  of  machines,  plans, 


58    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

or  models  of  machinery ;  and  the  emigration  of  skilled 
workmen  was  forbidden.  After  unsuccessful  attempts 
to  secure  a  knowledge  of  English  machinery  and  meth- 
ods, a  cotton  mill  was  finally  equipped  in  1790,  at 
Pawtucket,  R.  I.  A  few  years  later  the  cotton  gin  was 
invented.  Yet  the  cotton  industry  grew  very  slowly  until 
after  1807,  when  foreign  commerce  was  forbidden  by  the 
embargo,  and  domestic  manufactures  rapidly  developed. 
Slater's  cotton  mill  at  Pawtucket  marked  the  estab- 
lishment of  the  factory  system  in  the  United  States. 
. ,  ,  Yet  weaving  was  still  performed  by  hand, 

The  completed  °  l  J 

factory sys-     and  weaving  and  spinning  were  not  united 

in  a  single  factory.  In  1814  Mr.  Francis 
Lowell  constructed  a  power  loom  at  Waltham,  Mass., 
and  completed  a  factory  equipped  with  machinery  for 
spinning  and  weaving  cotton.  This  marked  the  com- 
pletion of  the  factory  system.  Before  long  other  indus- 
tries were  developed  in  a  similar  manner,  and  American 
manufactures  commenced  a  period  of  steady  growth. 

III.     Transportation. 

§  37.   The  first  roads  in  the  colonies  had  to  be  cut 
through  the  dense   forests   that   covered   the   Atlantic 
Roads.  coast  regions.     Indian  trails  offered  more 

or  less  beaten  ways  that  were  often  widened  and 
straightened  into  highways.  Continuous  roads  finally 
connected  the  principal  towns  of  the  tidewater  districts, 
but  wagon  roads  did  not  exist  far  from  the  scacoast 
until  after  1750.  Bridges  were  constructed  very  slowly, 
and  most  rivers  had  to  be  forded.     The  larger  streams 


TRANSPORTATION.  59 

wore  crossed  by  ferries,  which  gave  very  poor,  and  often 
dangerous,  service.  The  colonial  roads  were 'in  the 
charge  of  the  local  political  units,  the  towns  and 
counties.  They  were  constructed  only  as  local  needs 
demanded,  without  reference  to  any  general  plan  for 
colonial  highways.  The  "  road  tax  "  levied  by  the  towns 
or  counties  was  paid  in  labor,  not  in  money;  and  the 
work  of  road  building  was  very  badly  done.  Both  this 
custom  of  "  working  out  the  road  tax,"  and  the  bad 
roads  produced  by  it,  remain  in  many  country  districts 
to  ibis  day.  About  1790  turnpike  roads,  or  highways 
constructed  and  maintained  by  tolls,  began  to  be  built. 
Early  in  the  present  century  the  turnpike  systems  were 
rapidly  extended.  These  roads  were  built  by  corpora- 
tions which  were  given  rights  of  way,  and  allowed  to 
charge  tolls.  They  were  advantageous  in  a  time  when 
the  local  governments  could  not  be  induced  to  build  ade- 
quate highways,  but  grave  abuses  soon  appeared.  The 
tolls  were  often  excessive  and  the  roads  were  poor.  In 
more  recent  times  the  tendency  has  been  to  bring  all 
roads  under  public  control,  and  to  provide  for  highways 
by  general  taxation.  Still  more  recently  some  of  the 
si  ale  governments  have  begun  to  aid  in  the  very  neces- 
sary work  of  improving  our  roads,  which  are  the  worst 
to  be  found  in  any  civilized  country. 

Early   in   this   century,  after   settlements   had   been 
planted  west  of  the  Allcghanics,  it  became 

1  B  '  Road  building 

very  necessary  to  have  some  means  of  com-  by  the  united 
munication  between  the  seaboard    and   the 
Mississippi  Valley.     There  arose  a  strong  movement  in 


60    ECONOMIC  HISTORY  OF   THE    UNITED  STATES. 

favor  of  the  construction  of  long-distance  highways, 
canals,  and  other  improvements  by  the  national  govern- 
ment. Between  1806  and  1837  the  United  States  built 
a  highway  known  as  the  Cumberland  Road,  which  ex- 
tended from  Washington  to  Cumberland,  and  thence  by 
way  of  Wheeling,  through  Ohio,  Indiana,  and  Illinois,  to 
the  Mississippi  River  near  St.  Louis.  By  1840,  a  grow- 
ing opposition  to  internal  improvements  by  the  national 
government  put  an  end  to  such  expenditures  by  the 
United  States. 

§  38.  The  original  colonies  were  favored  with  easy 
means  of  intercolonial  communication  by  sea,  while  a 
Transporta-  number  of  navigable  rivers  gave  access  to 
tionbywater.  the  interior  regions  of  the  seaboard.  Lines 
of  packet  sloops  were  established  along  the  seacoast 
and  on  the  Delaware  and  Hudson  rivers.  After  1807 
steamboats  were  placed  upon  many  of  these  routes.  A 
few  years  later  they  appeared  upon  the  Great  Lakes. 
On  the  rivers  of  the  Mississippi  Valley,  steam  navigation 
was  exceedingly  important,  From  1815  to  1860,  steam- 
ships multiplied  on  all  these  waters.  They  furnished  an 
easy  means  of  access  to  all  parts  of  this  region,  and 
greatly  hastened  the  development  of  the  Valley.  After 
1860  the  railroads  began  to  secure  a  large  part  of  this 
carrying  trade.  On  the  Great  Lakes  the  steamboat  has 
held  its  own,  and  to-day  the  lake  fleet  comprises  more 
than  one  fourth  of  our  entire  merchant  marine. 

Washington,  when  a  young  man,  perceived  the  possi- 
bility and  desirability  of  constructing  canals  connecting 
the  Hudson  River  and  the  (neat  Lakes,  and  connecting 


TRA  NSP  OR  TA  TTON.  61 

Chesapeake  Bay  with  the  Ohio  River.  Between  1790 
and  1800  many  canals  were  projected,  and  a  few  were 
built.  The  era  of  canal  construction  really 
commenced  after  1820.  The  Erie  Canal 
was  opened  from  the  Hudson  River  to  Lake  Erie  in 
1825,  and  soon  cheapened  transportation  from  the  Ohio 
Valley  to  the  seaboard  so  that  rates  fell  to  one  tenth  of 
the  former  cost.  Branches  were  built,  and  towns  and 
cities  sprang  up  wherever  the  canal  met  a  branch  or  a 
natural  watercourse.  Before  long  other  canals  were 
built  between  the  Ohio  River  and  Lake  Erie,  between 
the  Hudson  and  Lake  Champlain,  and  between  the  coal 
regions  of  northeastern  Pennsylvania  and  the  seacoast. 
Many  states  entered  upon  the  construction  of  elaborate 
canal  systems.  Pennsylvania,  Virginia,  Indiana,  and 
Illinois  were  among  the  number.  Generally  these  canals 
proved  unsuccessful,  and  were  either  abandoned  or  fell 
into  the  hands  of  railroads.  Indeed,  railroads  made 
their  appearance  very  soon  after  the  canals  were  opened. 
In  many  cases  the  canals  could  not  compete  with  the 
railroads;  but  other  canals,  notably  the  Erie,  proved  to 
be  successful  competitors,  and  have  tended  permanently 
to  lower  transportation  charges. 

§  39.  By  1830  the  era  of  railway  transportation  was 
opened  by  the  completion  of  the  first  few  miles  of  the 
Baltimore  and  Ohio  Railroad.  Shortly  after,  ^^^^ 
railroads  were  built  from  Boston  to  Albany,  transportation, 
from  Richmond  to  Chesterfield,  from  Albany  to  Sara- 
toga, and  from  Charleston  to  Hamburg.  By  1840  there 
were   2,755   miles   of   railways  in    the    United   States. 


62    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

Practically  all  were  in  the  Atlantic  States,  and  they 
were  short,  independent  lines,  radiating  from  Boston, 
Albany,  New  York,  Philadelphia,  Baltimore,  Richmond, 
and  Charleston.  They  were  local  roads,  yet  they  fur- 
nished an  almost  continuous  line  of  transportation  from 
New  York  to  North  Carolina.1 

Between  1840  and  1850,  railroads  were  extended  very 

rapidly  in   New   England,  where  2,600  miles  of   track 

were  in  operation  the  latter  year.      A  road 

Second  decade  l  J 

ofrauroad  was  completed  from  Boston  to  Albany,  so 
that  New  England  was  placed  in  direct  com- 
munication with  the  West,  via  the  Erie  Canal.  By 
1850,  railroads  had  been  pushed  well  into  the  western 
portions  of  New  York,  Pennsylvania,  and  Maryland. 
Georgia  had  started  a  railway  system,  while  roads  were 
being  constructed  in  the  Mississippi  Valley.  As  yet  no 
lines  of  railway  connected  the  seaboard  with  the  West, 
while  the  roads  still  remained  local  companies  serving- 
local  needs. 

From  1850  to  1860  the  railway  mileage  of  the  United 
States  increased  from  8,571  to  28,919  miles.  The  Mid- 
The  turd  die  Atlantic  States  rapidly  pushed  their  rail- 
decade,  ways  westward.  In  the  Southern  States 
remarkable  progress  was  made.  But  in  the  Mississippi 
Valley  railroad  expansion  was  most  noteworthy.  Chi- 
cago and  St.  Louis  were  finally  connected  with  ihc 
Atlantic  coast,  while  the  states  north  of  the  Ohio  and 
east  of  the  Mississippi  were  covered  Avith  a  network  of 

1  See  Scribner's  Statistical  AJtlaa  for  maps  showing  railroad  construc- 
tion by  decades. 


TRANS  P  OR  TA  TION.  63 

railways.  Twenty-seven  million  acres  of  public  lands 
had  been  granted  by  Congress  to  aid  the  construction  of 
railroads  in  the  West  and  South.  The  people  looked 
upon  the  roads  in  a  friendly  manner ;  and  states,  coun- 
ties, and  towns  granted  large  sums  of  money  to  further 
their  construction. 

The  Civil  War  checked  railroad  building  only  tem- 
porarily. After  1866  it  was  continued  on  a  larger  scale 
than  ever.  For  political  reasons  the  United  The  fourth 
States  favored  the  construction  of  railroads  decade- 
to  connect  the  Pacific  coast  with  the  rest  of  the  Union, 
and  granted  millions  of  dollars  and  millions  of  acres  of 
land  to  aid  the  Union  and  Central  Pacific  roads.  Then 
in  the  Southwest  and  Northwest  land  grants  and  sub- 
sidies to  railways  were  renewed. 

In  1873  the  country  had  68,48-4  miles  of  railroads. 
Since  that  time  many  thousand  miles  of  road  have  been 
built  in  the  states  west  of  the  Mississippi, 

1  r       Railroad  con- 

and  other  lines  have  been  pushed  through  to  struction  from 
the  Pacific  coast.  In  1896  there  were  over 
180,000  miles  of  railroads  in  the  country.  During  the 
last  twenty-five  years,  railways  have  often  been  con- 
structed as  speculative  enterprises  far  in  advance  of  the 
needs  of  the  country.  Sometimes  the  construction  of 
such  a  road  leads  to  the  rapid  development  of  the  region 
through  which  it  runs,  and  so  creates  a  paying  business. 
But  such  enterprises  often  lead  to  the  building  of  un- 
necessary lines  that  can  have  no  immediate  prospect  of 
becoming  paying  investments. 

The   character   of  American   railways    has    changed 


64    ECONOMIC  HISTORY  OF   THE   UNITED  STATES 

greatly  since  1850.  The  early  roads  were  short,  local 
Railroad  con-  affairs.  Between  1850  and  18G0  local  roads 
soiidation.  began  to  be  consolidated  into  through  lines. 
Thus  the  numerous  local  roads  that  together  covered 
the  distance  from  Albany  to  Buffalo  were  consolidated 
by  Vanderbilt  into  the  New  York  Central  Railroad. 
About  the  same  time  the  Pennsylvania  Railroad  secured 
a  through  line  from  Philadelphia  to  Pittsburg,  and  the 
Baltimore  and  Ohio  pushed  its  way  westward.  Then 
followed  efforts  to  secure  control  of  .roads  that  should 
give  access  to  Chicago  and  other  points  in  the  Missis- 
sippi Valley.  At  length,  five  trunk  lines  were  formed, 
controlling  through  routes  from  the  West  to  the  sea- 
board. In  all  directions  a  similar  process  went  on.  The 
reason  for  such  consolidation  was  that  the  union  of 
several  short  lines  under  one  management  diminished 
the  expenses  of  operation. 

The  establishment  of  trunk  lines  introduced  a  new 
era  of  railroad  rate-making.  The  old  local  roads  had 
enjoyed  a  practical  monopoly  in  their  several  districts. 
Competition  existed  only  at  a  few  points  where  com- 
peting roads  met.  But  the  trunk  lines  could  compete 
with  each  other  for  the  through  freight  between  the 
West  and  the  East,  and  the  sharpest  rivalry  sprung  up. 
The  economies  of  operation  made  possible  by  consolida- 
tion enabled  the  trunk  lines  to  reduce  their  charges, 
while  competition  for  through  traffic  obliged  them  to  do 
so.  Competition  finally  became  so  fierce  as  to  lead  to 
"  railroad  wars,"  in  which  rates  were  often  lowered  be- 
low the  cost  of  transportation.     Such  "  cut-throat  com- 


SHIP  BUILDING.  65 

petition  "  was  followed  by  pooling  agreements  bet  ween 
the  different  roads,  by  which  rates  were  maintained  at  a 
higher  level,  and  the  profits  thus  secured  were  divided 
between  the  roads  composing  the  pool.  In  1887  Congress 
prohibited  the  formation  of  pools,  and  endeavored  by 
an  Inter-State  Commerce  Act  to  remedy  certain  abuses. 
But  the  roads  have  frequently  succeeded  in  maintaining 
rates  by  traffic  agreements  of  a  more  or  less  secret  char- 
acter. The  consolidation  of  railroads  did  not  end  with 
the  establishment  of  through  lines  east  of  Chicago. 
West  of  that  city  the  work  of  consolidation  has  ex- 
tended to  the  Missouri  River,  and  from  the  Missouri  to 
the  Pacific.  Between  St.  Louis  and  the  Southwest  the 
same  process  has  gone  on.  In  1890  it  was  estimated 
that  one  eighth  of  the  railway  mileage  of  the  country 
was  under  a  single  management,  while  over  one  half  of 
the  railroads  had  fallen  under  the  control  of  twenty 
other  managements.  The  prospect  is  that  a  few  great 
trans-continental  lines  will  finally  control  all  the  trans- 
portation business  of  the  country,  except  that  which  is 
of  a  purely  local  character. 

IV.    Ship  Building. 

§  40.  The  forests  of  the  New  World  supplied  abun- 
dant materials  for  ship  building,  which  was  begun  in  the 
first  years  of  the  colonial  history.  Massachu-  Co]oniai  ship 
setts  had  built  one  hundred  and  twenty  ves-  b*11^?- 
sels  as  early  as  1655.  By  1700,  many  ships  were  built 
each  year  in  New  York,  Pennsylvania,  and  Delaware. 
In  the  southern  colonies  less  was  accomplished  until  the 

5 


GO    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

middle  of  the  eighteenth  century,  when  ship  building 
developed  rapidly  in  all  of  the  colonies.  In  the  year 
1769  over  three  hundred  and  eighty  vessels,  with  a  total 
burden  of  20,000  tons,  were  constructed  in  America. 
Between  1780  and  1800,  wooden  vessels  were  built  upon 
some  of  the  Great  Lakes.  Ship  building  was  the  first 
mechanical  industry  to  be  largely  developed  in  the  colo- 
nies, and  it  made  possible  the  growth  of  a  large  and 
profitable  commerce. 

§  41.    In  1789  the   tonnage  of   the   ships   registered 

in  the   foreign  trade  was  123,893  tons.     For  the  next 

twenty-five   years    Europe   was    in   a   state 

American  . 

shipping  from  of  continual  war,  and  American  ships  se- 
cured a  large  part  of  the  carrying  trade  of 
Europe.  By  1806,  the  ships  registered  in  foreign  trade 
had  a  tonnage  of  795,507  tons.  In  the  same  year  the 
ships  in  the  coasting  trade  had  a  tonnage  of  340,540 
tons,  while  the  sea  fisheries  employed  ships  with  a  ton- 
nage of  over  69,000  tons.  The  United  States,  in  1790 
and  1792,  levied  discriminating  taxes  upon  foreign  ships, 
with  the  possible  result  of  throwing  more  of  our  com- 
merce into  the  hands  of  American  ship  owners.  After 
1816  the  restoration  of  peace  in  Europe  caused  us  to 
lose  a  part  of  the  carrying  trade  of  European  countries. 
In  1840  our  foreign  trade  employed  no  larger  tonnage 
than  in  1806,  but  our  coasting  trade  employed  ships  with 
a  tonnage  of  1,176,000  tons.  Between  1817  and  1820 
our  navigation  laws  were  extended,  and  made  especially 
severe  against  foreign  ships.  The  reason  for  such  illib- 
eral measures  was  the  resentment  aroused  by  the  harsh 


SHIP  BUILDING.  67 

policy  pursued  by  England  until  1830.  The  laws  en- 
acted by  Congress  at  that  date  are  mainly  unchanged  at 
the  present  day.  They  aim  to  prevent  Americans  from 
purchasing  foreign  ships  and  entering  them  under  Amer- 
ican registry.  They  exclude  foreign  vessels  from  our 
coasting  trade,  and  impose  discriminating  charges  upon 
foreign  ships.  Many  of  these  regulations  prove  hin- 
drances to  American  interests,  while  they  have  not  bene- 
fited American  ship  builders  materially. 

§  42.  From  1840  to  1861  the  tonnage  of  the  vessels 
registered  in  the  foreign  trade  increased  from  762,838 
to  2,496,894  tons,  while  the  tonnage  of  the 

'  .  '  &  Ship  building 

coasting  fleet  increased  to  2,704,544  tons,  from  i84o  to 
During  this  period  seventy  per  cent  of  our 
foreign  commerce  was  carried  in  American  vessels,  while 
our  ships  did  a  large  part  of  the  carrying  trade  of  the 
world.  In  producing  wooden  sailing  vessels  American 
ship  builders  were  unequaled,  and  their  magnificent  clip- 
per ships  were  superior  to  all  others.  This  was  ac- 
complished, moreover,  when  wages  and  the  cost  of  all 
materials  except  wood  were  much  higher  than  in  other 
countries.  But,  after  1850,  steamships  began  to  replace 
sailing  vessels  in  ocean  commerce.  In  the  construction 
of  steamships  the  United  States  was  soon  outstripped  by 
Great  Britain.  The  Civil  War  struck  a  terrible  blow  to 
American  shipping  interests,  and  our  merchant  marine 
rapidly  diminished. 

§  43.  Since  the  war  our  foreign  marine  has  also  con- 
stantly declined,  although  the  ships  engaged  in  the  coast- 
ing trade  have  increased.    On  the  Great  Lakes  there  has 


68     ECONOMIC  HISTORY   OF   THE   UNITED  STATES. 

been  wonderful  progress.  The  total  merchant  marine  of 
the  United  States  diminished  from  5,539,813  tons  in 
1861  to  4,684,029  tons  in  1894.  At  the  same  time,  the 
proportion  of  our  foreign  trade  carried  in  American  ships 
decreased  from  75  per  cent  in  1855  to  13.3  per  cent  in 
causes  for  the  1894.  The  causes  of  this  decline  are  par- 
decttne  of  our  tiall    in  dispute.    But  it  certainly  began  a  few 

merchant  ma-  J  c  j        o 

rine.  years  before  the  Civil  War,  so  that  the  rav- 

ages of  Confederate  privateers  only  hastened  a  process 
that  had  already  commenced.  One  primary  cause  is  the 
fact  that  iron  and  steel  ships  have  so  largely  replaced 
wooden  vessels.  As  early  as  1855  it  was  determined 
that  iron  ships,  although  more  expensive  to  construct, 
were  in  the  end  more  durable  and  consequently  cheaper 
than  wooden  ships.  It  also  appeared  that  iron  vessels 
better  withstand  the  strain  of  heavy  steam  machinery. 
More  recently,  steel  has  replaced  iron  for  ship  construc- 
tion. Now,  American  builders  had  a  great  advantage  in 
the  cheapness  of  their  wood  supply,  as  well  as  in  their 
skill  in  constructing  wooden  vessels.  Iron  ships,  how- 
ever, could  be  built  more  cheaply  in  England ;  and  there- 
fore the  ocean-carrying  trade  passed  to  ships  of  English 
construction.  More  than  this,  American  builders  were 
handicapped  by  the  fact  that  they  were  very  slow  in  turn- 
ing from  sailing  vessels  to  the  construction  of  steam- 
ships. So  long  as  steel  vessels  retain  their  present 
superiority,  American  ship  builders  will  not  regain  their 
former  position  until  they  are  able  to  construct  steel 
vessels  as  cheaply  as  the  builders  of  foreign  nations. 
In  recent  years  the  outlook  has  improved.     The  creation 


TEXTILE   INDUSTRIES.  69 

of  our  new  navy  has  stimulated  the  construction  of  steel 
vessels,  while  the  cost  of  building  them  has  greatly  de- 
creased. The  expense  for  labor  is  the  principal  item  of 
cost  that  is  larger  here  than  in  England,  but  this  dis- 
parity seems  to  be  diminishing.  Unquestionably,  the 
steel  ships  now  constructed  in  this  country  are  unex- 
celled in  any  particular  by  ships  manufactured  in  any 
country  of  the  world. 

V.    The  Textile  Industries. 

§  44.  Spinning  machinery  was  introduced  into  the 
cotton  industry  in  1790,  but  nearly  twenty  years  passed 
before   as   much  was    accomplished    in   the 

1  The  cotton 

woolen  industry.  The  period  of  commercial  and  woolen 
restriction  following  the  embargo  in  1807 
practically  shut  off  foreign  supplies.  This  caused  a 
rapid  development  of  woolen  and  cotton  manufactures. 
Many  of  the  mills  built  at  this  time,  however,  were  badly 
constructed  and  equipped,  so  that  they  turned  out  a  very 
coarse  product.  Between  1815  and  1825  the  power  loom 
was  introduced  into  this  country.  Large  factory  towns 
grew  up  in  such  places  as  Lowell,  Lawrence,  Fall  River, 
Cohoes,  and  Patterson. 

§  45.  Since  1820  the  growth  of  cotton  manufactures 
has  been  continuous.  The  industry  has  been  concen- 
trated largely  in  New  England  from  the  be- 

t     -i^r^r.  The  cotton 

ginning.     In  1890  seventy-six  per  cent  of  the     industry 
cotton  spindles  were  located  in  that  section,     after  I820' 
Massachusetts  having  the  largest  number.     Since  1870 
there  has  been  a  marked  development  of  cotton  manu- 


70     ECONOMIC  HISTORY   OF  THE   UNITED  STATES. 

facture  in  the  South.  The  capital  so  invested  increased 
from  $17,375,000  in  1880  to  $53,827,000  in  1890.  Since 
these  factories  can  obtain  raw  cotton  without  incurring 
any  considerable  expense  for  cost  of  transportation,  it 
seems  probable  that  the  future  development  of  this 
industry  in  the  South  will  be  rapid.  The  following  table 
shows  the  rapid  growth  of  cotton  manufactures  in  the 
United  States :  — 


1840. 

1880. 

1890. 

Value  of  product 

Pounds  of  raw  cotton  ) 
consumed                   ) 

Number  of  spindles  in  ) 
factories                      ) 

Capital  invested 

$46,350,000 
126,000,000 

2,284,000 
$51,102,000 

$192,090,000 
750,343,000 

10,653,000 
$208,280,000 

$267,981,000 
1,117,945,000 

14,188,000 
$354,020,000 

The  cotton  manufacture  in  the  United  States  has  been 

conducted  hitherto  mainly  for  supplying  the   domestic 

market.     In  the  Tenth  Census,  Mr.  Atkinson  summed 

up  the  situation  as  follows  :   "  The  principal 

Present  con-  ,     ,    ,,  r   .     .        .      ~  , 

dition  of  market  for  our  own  fabrics  is  found  among 
the  cotton  the  thrifty  working  people,  who  constitute 
the  great  mass  of  our  population.  It  has 
therefore  happened  that,  although  we  have  not  until  re- 
cently undertaken  the  manufacture  of  very  fine  fabrics, 
the  average  quality  of  the  fabrics  that  we  do  make  is 
better  than  that  of  any  other  nation,  with  the  possible 
exception  of  France.     It  is  for  tlto  wants  of  the  million 


TEXTILE   INDUSTRIES.  71 

that  our  cotton  factories  are  mainly  worked,  and  we 
have  ceased  to  import  staple  goods,  and  shall  never  be 
likely  to  resume  their  import.  On  the  other  hand,  we 
may  for  a  long  period  continue  to  import  the  finer  goods 
that  depend  mainly  on  fashion  and  style  for  their  use, 
and  that  are  purely  articles  of  luxury."  Yet  in  1895 
we  exported  over  $13,789,000  of  cotton  manufactures, 
while  imports  of  this  sort  amounted  to  $33,196,625. 
In  the  future  it  is  probable  that  the  United  States,  hav- 
ing the  advantage  of  immediate  proximity  to  the  great 
source  of  the  world's  supply  of  raw  cotton,  will  surpass 
other  countries  not  similarly  situated. 

§  46.  The  manufacture  of  woolen  fabrics  did  not  de- 
velop as  rapidly  as  the  manufacture  of  cotton.  One 
reason  for  this  was  that  the  domestic  supply  The  w00ien 
of  wool  has  never  been  sufficient,  while  of  industry- 
cotton  this  country  has  possessed  a  cheap  and  abundant 
supply.  Moreover,  tariff  duties  often  imposed  on 
imported  wool  have  for  much  of  the  time  increased 
the  cost  of  raw  materials  to  the  manufacturer.  The 
woolen  manufactures  that  sprung  up  during  the  War 
of  1812  suffered  considerable  reverses  after  1815,  but 
by  1828  the  industry  seemed  to  have  surmounted  what- 
ever initial  difficulties  there  may  have  been  in  the  way 
of  its  development. 

The  statistical  table  on  page  72  shows  the  growth  of 
woolen  manufactures  in  the  United  States  since  1810. 

It  is  interesting  to  study  the  location  of  the  woolen 
industry  in  the  United  States.  At  the  opening  of  the 
present   century    it    was,   like  all  domestic    industries, 


72    ECONOMIC  HISTORY  OF  THE   UNITED   STATES. 


Articles. 

1840. 

1860. 

1880. 

1890. 

Woolen  Goods : 

1.  Capital 

2.  Product 

Worsted  Goods : 

1.  Capital 

2.  Product 

Carpets : 

1.  Capital 

2.  Product 

Felt  Goods : 

1.  Capital 

2.  Product 

Wool  Hats : 

1.  Capital 

2.  Product 

Hosiery  and 
Knit  Goods : 

1.  Capital 

2.  Product 

§15,765,000 
20,696,000 

$30,862,000 
61,894,000 

3,230,000 
3,701,000 

4,721,000 
7,857,000 

4,035,000 
7,280,000 

$96,095,000 
160,606,000 

20,374,000 
33,549,000 

21,468,000 
31,792,000 

1,958,000 
3,619,000 

3,615,000 
8,516,000 

15,579,000 
29,167,000 

$130,989,000 
133,577,000 

68,085,000 
79,194,000 

38,208,000 
47,770,000 

4,460,000 
4,654,000 

4,142,000 
5,329,000 

50,607,000 
67,241,000 

Total : 

1.  Capital 

2.  Product 

15,765,000 
20,696,000 

42,849,000 
80,734,000 

159,091,000 
267,252,000 

296,494,000 
337,768,000 

widely  diffused  throughout  the  country.  With  the  rise 
of  the  factory  system,  it  hecame  more  concentrated 
either  near  the  sources  of  the  domestic  wool  supply, 
or  by  available  water  powers.  Gradually,  however,  the 
manufacture  has  become  concentrated  near  the  markets 
where  both  foreign  and  domestic  wools  are  more  easily 
gathered,  and  in  the  vicinity  of  labor  markets  where 
skilled  textile  operatives  are  to  be  found.  Eight  cities, 
Philadelphia,  Lawrence,  Providence,  and  Lowell  being 
the  most  important,  now  turn  out  nearly  thirty-six  per 


TEXTILE  IND  US  Til  I ES. 


73 


cent  of  the  woolen  product  of  the  country.  New  Eng- 
land, New  York,  New  Jersey,  and  Pennsylvania  possess 
more  than  eighty-five  per  cent  of  the  woolen  machinery. 
Of  these,  Pennsylvania  leads,  Massachusetts  holding 
second  place.  At  the  present  time  the  woolen  goods 
produced  in  the  United  States  are  sufficient  to  supply 
eighty-nine  per  cent  of  the  domestic  demand.  In  1895 
imports  of  woolen  goods  amounted  to  $38,539,000, 
while  the  exports  were  less  than  one  million  dollars. 
§  47.  A  complete  account  of  the  textile  industries  of 
the  United  States  should  include  some  mention  of  the 
silk  manufacture  and  of  establishments  de-  combined  tex- 
voted  to  dyeing  and  finishing  textile  prod-  tne  industries, 
nets.  The  product  of  silk  fabrics  has  increased  from 
$1,809,000  in  1850  to  $87,298,000  in  1890 ;  while  the 
product  of  the  dyeing  and  finishing  industries  in  1890 
was  $28,900,000.  The  imports  of  silk  manufactures  in 
1895  amounted  to  $31,206,000,  and  the  exports  of  such 
goods  were  insignificant.  The  following  table  shows  how 
the  textile  industries  of  the  United  States  are  concen- 
trated in  the  same  states  :  — 


Locality. 


United  States 
Massachusetts 
Pennsylvania 
New  York 
Hlioile  Island 
New  Jersey 
Connecticut 
New  Hampshire 
Maine 


Woolen 

Product, 

1890. 


$337,708,524 

7,_>.C>S1,40S 

89,337,419 
53,340,151 
84,722,493 

9,984,640 
20,843,965 
14,445,172 

8,814,256 


Cotton, 
1S90. 


$267,981,724 

100,202,882 

18,431,773 

9,777,295 

27,310,499 

5,902,615 

15,409,476 

21,958,002 

15,316,909 


Silk, 
1890. 


$87,298,454 

5,557,5(19 

19,357,546 
19,417,790 

2,229,062 
30,760,371 

9,788,951 


Dyeing  and 
Finishing, 

1890. 


$28,900,560 
6,496,215 
5,240,761 
3,636,051 
4,743,561 
6,183,397 
15,388 


Not  separately  reported. 
Not  separately  reported. 


Total 
Textiles. 


$721,949,262 
184,938,074 
132,367,499 
86,171,293 
67,005,615 
52,831,023 
46,757,780 
37,256,364 
24,911,166 


74     ECONOMIC  HISTORY  OF   THE    EXITED  STATES. 

VI.     Iron  and  Steel  Industries. 

§  48.   The    Industrial   Revolution   began    an   era   of 

machine    production,   and   caused   a   new   demand    for 

iron   as  the  material   needed   for   machine 

The  iron  in- 
dustry from     construction.      Therefore    iron    occupies   a 

1789  to  I860.  ...  ,  r         •  i-  i.  ii 

position  oi  peculiar  importance  at  the  pres- 
ent day.  The  development  of  other  industries  neces- 
sarily increases  the  demand  for  iron,  while  a  depression 
in  business  causes  the  demand  to  slacken.  Many  years 
passed  before  the  revolution  in  English  methods  of  pro- 
ducing iron  affected  the  industry  in  the  United  States. 
Until  nearly  1840  iron  continued  to  be  smelted  by  char- 
coal, with  methods  that  differed  little  from  those  of 
colonial  times.  Pennsylvania  already  produced  one  half 
of  the  iron  smelted  in  this  country,  and  Pittsburg  was 
becoming  the  center  of  the  iron  industry  in  western 
Pennsylvania.  About  1840  anthracite  coal  was  used  in 
smelting,  and  the  blast  furnaces  began  to  be  improved. 
The  industry  was  then  placed  on  a  modern  basis,  and 
the  product  increased  from  200,000  tons  of  pig  iron  in 
1830  to  over  000,000  tons  in  1860.  In  1850  coke  began 
to  be  used  in  smelting,  and  some  years  later  uncoked 
bituminous  coal  was  employed.  Gradually  the  produc- 
tion of  pig  iron  was  concentrated  in  the  vicinity  of  the 
coal  supplies,  since  it  was  cheaper  to  carry  iron  to  the 
coal  regions  than  to  carry  coal  to  the  iron  mines.  Thus 
most  of  the  iron  produced  in  Michigan  has  been  smelted 
in  other  states  where  coal  is  more  abundant.  By  185G 
the  iron  and  coal  resources  of  the  United  States  had 
been  developed  so  far  thai   Mr.  Abram  S.  Hewitt  could 


IRON  AND  STEEL. 


75 


write,  "  In  point  of  fact  the  materials  for  making  a  ton 
of  iron  can  be  laid  down  in  the  United  States  at  the 
furnace  with  less  expenditure  of  human  labor  than  in 
any  part  of  the  known  world,  with  the  possible  excep- 
tion of  Scotland."  Ten  years  later  the  English  econo- 
mist Jevons  wrote,  "  It  is  impossible  there  should  be 
two  opinions  as  to  the  future  seat  of  the  iron  trade. 
The  abundance  and  purity  of  both  fuel  and  ore  in  the 
United  States,  with  the  commercial  enterprise  of  Ameri- 
can manufacturers,  put  the  question  beyond  doubt." 

§  49.  Yet  the  iron  resources  of  the  country  had 
hardly  begun  to  be  developed  in  1860.  The  increase 
in  the  product  of  pig  iron  during  the  thirty  years  from 
1860  to  1890  is  shown  herewith  :  — 


Year. 

Product  in  Tons. 

Value. 

1860 
1870 
1880 
1890 

987,559 
2,052,821 
3,781,021 
9,906,607 

$20,870,000 
69,640,000 
89,315,000 

145,643,000 

Of  this  product  Pennsylvania  has  produced  nearly 
one  half,  —  Ohio,  Illinois,  and  Alabama  coming  next  in 
importance.     In  1860  the  steel  product  of  . 

1  r  Iron  and  steel 

the  United  States  was  very  small,  amount-  industries 
ing  to  only  11,838  tons,  valued  at  $1,778,240.  "^  I86°' 
In  1867  steel  was  made  by  the  newly  introduced  Besse- 
mer and  open-hearth  processes,  and  the  industry  has 
ever  since  shown  a  constantly  increasing  product.  In 
1890  the  rolling  mills  and  steel  works  turned  out 
5,049,000   tons  of  steel.     The  Census  of  1880  showed 


76    ECONOMIC  HISTORY  OF   THE   UNITED  STATES. 

the  United  States  to  be  "  the  second  iron-making  and 
steel-making  country  in  the  world."  Since  that  time  it 
has  surpassed  England  in  this  respect. 

§  50.    Many  kinds  of  manufactures  of  iron  and  steel 

have  been  established  in  this  country  for  a  long  time. 

„     M  The  manufacture  of  wrought-iron  nails,  of 

Manufactures  ° 

of  iron  the  simpler  kinds  of  tools  and  cutlery,  and 

of  firearms  are  some  of  the  older  branches 
of  this  industry.  Yet  up  to  1860  the  American  market 
was  largely  supplied  by  foreign  producers  of  iron  and 
steel  manufactures.  The  exports  of  such  commodi- 
ties never  exceeded  $1,000,000  until  after  1840,  and 
amounted  to  only  $10,000,000  in  1865.  During  the 
last  fifty  years,  however,  remarkable  progress  has  been 
made  in  the  American  manufacture  of  iron  and  steel. 
Wire  and  cut  nails,  iron  and  steel  pipes,  cutlery,  tools 
and  machinery  of  all  kinds,  stationary  and  locomotive 
engines,  arms  and  armor  plate,  steel  rails,  and  many 
other  products  of  iron  and  steel  are  now  turned  out  in 
quantity  sufficient  to  supply  the  greater  part  of  the  do- 
mestic demand  and  to  leave  a  surplus  for  export.  In 
1895  the  iron  and  steel  products  exported  from  the 
United  States  amounted  to  $82,000,000,  while  the  im- 
ports of  such  commodities  were  slightly  more  than 
$23,000,000.  One  important  feature  of  this  kind  of 
American  manufacture  has  been  the  early  and  exten- 
sive use  of  interchangeable  mechanism.  Firearms, 
sewing  machines,  locomotive  engines,  watches,  clocks, 
agricultural  implements,  and  many  other  products  have 
been  constructed  with  interchangeable  parts  ;  and  in 
this  field  American  manufacturers  have  won  celebrity. 


LITERATURE.  77 


LITERATURE   ON    CHAPTER   III. 

On  Colonial  Manufactures :  Weeden,  Economic  and  Social 
History  of  New  England  ;  Bruce,  Economic  History  of  Virginia  ; 
Eighty  Years'  Progress,  II. ;  Beer,  Commercial  Policy  of  Eng- 
land toward  the  American  Colonies ;  Taussig,  State  Papers  and 
Speeches  on  the  Tariff,  1-107 ;  Swank,  History  of  the  Manufac- 
ture of  Iron  ;  Bishop,  History  of  American  Manufactures ;  Wright, 
Industrial  Evolution  of  the  United  States,  23-103. 

On  the  "Industrial  Revolution":  Toynbee,  The  Industrial 
Revolution ;  Gibbins,  The  Industrial  History  of  England,  143-22-4 ; 
Cunningham,  Outlines  of  English  Industrial  History;  Cunning- 
ham, Growth  of  English  Industry  and  Commerce,  II. ;  Rogers, 
Six  Centuries  of  Work  and  Wages  ;  Hobson,  Evolution  of  Modern 
Capitalism,  10-116;  Ely,  Outlines  of  Economics,  26-62;  Wright, 
Industrial  Evolution  of  the  United  States;  Wright,  The  Factory 
System  of  the  United  States,  Tenth  Census,  II.  529-610  ;  Taylor, 
History  of  the  Factory  System ;  Rand,  Selections  Illustrating 
Economic  History  since  1763 ;  Taussig,  Tariff  History  of  the 
United  States,  1-67. 

On  Transportation :  Eighty  Years'  Progress,  II. ;  Weeden, 
Economic  and  Social  History  of  New  England ;  Bolles,  Indus- 
trial History  of  the  United  States,  603-664;  McMaster,  History 
of  the  People  of  the  United  States ;  Jenks,  Road  Legislation  for 
the  American  State ;  Shaler,  American  Highways ;  Johnson's 
Universal  Cyclopaedia,  "  Transportation ;  "  Tenth  Census,  IV. ; 
Eleventh  Census,  Report  on  Transportation  Business;  Scribner's 
Statistical  Atlas ;  Shaler,  The  United  States,  II.  65-190 ;  Had- 
ley,  Railroad  Transportation;  Poor's  Railroad  Manual,  1881. 

On  Ship  Building :  Wright,  The  Industrial  Evolution  of  the 
United  States,  29-42 ;  Bolles,  Industrial  History  of  the  United 
States,  569-602;  Tenth  Census,  VIII.;  Wells,'  Our  Merchant 
Marine ;  Bates,  The  American  Marine ;  Shaler,  The  United 
States,  I.  518-624. 

On  the  Textile  Industries:  Eighty  Years'  Progress,  IT.; 
Wright,  Industrial  Evolution  of  the  United  States,  132-188; 
Taussig,  Tariff  History  of  the  United  States  ;   Bishop,  History 


78    ECONOMIC  HISTORY   OF   THE    UNITED  STATES. 

of  American  Manufactures ;  Bolles,  Industrial  History  of  the 
United  States,  369-443 ;  Tenth  Census,  II. ;  Eleventh  Census, 
Reports  on  Textile  Industries. 

On  the  Iron  and  Steel  Industries :  Swank,  History  of  the 
Manufacture  of  Iron  ;  Bishop,  History  of  American  Manufactures ; 
Eighty  Years'  Progress,  II. ;  Bolles,  Industrial  History  of  the 
United  States,  185-315;  Wright,  Industrial  Evolution  of  the 
United  States ;  Taussig,  Tariff  History  of  the  United  States ; 
Tenth  Census,  II.  729-935 ;  Eleventh  Census,  Report  on  Manufac- 
turing Industries,  III. 


HUMAN    WANTS.  79 


CHAPTER  IV. 

THE   CONSUMPTION   OF  WEALTH. 
I.     Human   Wants. 

§  51.  The  preceding  chapters  have  explained  briefly 
the  history  of  the  leading  industries  by  which  the 
people  of  America  have  endeavored,  for  Deflation 
nearly  three  centuries,  to  supply  their  wants  of  economics- 
for  food,  shelter,  clothing,  and  all  those  commodities 
that  are  needed  to  support  life,  and  to  make  civilized 
existence  possible.  The  science  of  economics  treats  of 
precisely  these  efforts  of  mankind  to  secure  certain 
material  objects,  or  certain  services  of  other  people. 
It  deals,  in  short,  with  those  activities  of  man  which 
are  directed  toward  securing  a  living.  The  reason  why 
men  carry  on  these  activities  is  that  they  have  certain 
needs  or  wants  which  can  be  appeased  only  by  appro- 
priate human  action.  Therefore,  human  needs  may  well 
be  made  the  starting  point  of  economic  studies  ;  and 
our  first  work  will  be  to  examine  into  the  character  of 
the  wants  that  impel  men  to  constant  efforts  to  secure 
a  living  for  themselves  and  their  families. 

§  52.   Man  has  a  material  body  which  demands  cer- 
tain objects  necessary  for  its  preservation  and  develop- 


80  PRIXCiPLES  OF  EC  0X021 1  OS. 

ment.  From  this  source  arise  certain  bodily  wants,  some 
of  which  man  shares  in  common  with  other  animals.  The 
origin  of  hu-  needs  for  food,  drink,  clothing,  and  shelter 
man  wants.  for  one"s  seif  an(\  one's  family  are  the  prin- 
cipal bodily  wants  of  this  character.  Beyond  this  point 
the  wants  of  the  lower  animals  hardly  extend  ;  but  man, 
endowed  with  superior  faculties  and  a  higher  spiritual 
nature,  has  developed  a  multitude  of  higher  needs. 
Some  of  these  are  of  a  spiritual  character,  as  the  desire 
for  companionship,  for  intellectual  or  religious  develop- 
ment, and  the  like.  But  others  are  of  a  material  nature. 
As  men  become  more  intelligent  and  refined,  they  grow 
dissatisfied  with  the  ruder  and  coarser  forms  of  food, 
clothing,  and  shelter.  They  demand  more  varied  and 
palatable  food,  finer  clothing,  more  beautiful  houses. 
Their  aesthetic  faculties  transform  the  demands  of  their 
animal  natures,  and  infuse  a  spiritual  element  into  what 
were  formerly  simple  material  desires  for  food,  clothes, 
and  shelter.  A  dining  table  artistically  arranged,  a 
beautiful  dress,  or  a  finely  designed  house  will  serve  as 
examples  of  material  goods  that  satisfy  animal  wants 
which  have  been  partially  transformed  by  the  de- 
mands of  man's  aesthetic  faculties.  Moreover,  it  must 
be  noticed  that  many  spiritual  wants  can  be  satisfied 
only  through  the  medium  of  material  objects.  Thus  a 
printed  book  is  often  the  only  means  by  which  knowl- 
edge can  be  communicated  from  one  mind  to  another. 
Finally,  many  of  man's  higher  needs  have  a  distinctly 
social  character.  One  of  the  strongest  human  wants 
is  the  desire  for  the  society  of  one's  fellows.     Out  of 


HUM  AX    WANTS.  81 

this  desire  of  men  to  live  together  in  an  organized 
society,  there  arise  many  social  wants  of  an  economic 
character  which  are  oftentimes  satisfied  by  collective 
or  social  action.  Roads,  bridges,  sewers,  schools,  asy- 
lums, parks,  postal  facilities,  and  many  other  economic 
goods  are  the  result  of  social  action,  and  minister  to 
social  or  public  needs. 

§  53.  In  the  development  of  human  wants  a  certain 
order  can  be  observed.  In  the  lowest  stages  of  barba- 
rism, men  are  found  to  be  almost  devoid  of  Development 
any  but  the  animal  needs  and  desires.  They  of  wants- 
can  advance  in  civilization  only  as  fast  as  their  higher 
faculties  can  be  developed,  and  higher  wants  aroused 
within  them.  The  principal  difficulty  in  efforts  to  civi- 
lize a  savage  race  is  to  make  such  people  desire  any- 
thing more  than  the  purely  animal  satisfactions  with 
which  they  have  always  been  contented.  As  men  ad- 
vance in  the  scale  of  civilization,  their  wants  rapidly 
increase  in  number  and  variety-  We  have  seen  that 
this  is  due  to  the  development  of  higher  spiritual  facul- 
ties. These  both  arouse  within  men  higher  desires,  and 
also  make  it  possible  to  devise  means  for  their  gratifica- 
tion. These  higher  desires,  and  the  power  to  satisfy 
them,  are  alike  peculiar  to  man.  The  food  of  the  horse 
or  dog,  and  the  abodes  of  the  birds  or  the  beaver,  have 
in  all  known  times  remained  the  same,  except  as  they 
have  been  modified  by  human  action.  The  progress  of 
the  human  race  from  barbarism  to  civilization  has  been 
marked  first  and  fundamentally  by  an  increase  and  a 
diversification  of  wants.     This  has  been  due  to  the  influ- 

6 


82  PRINCIPLES  OF  ECONOMICS. 

ence  of  man's  spiritual  faculties  in  transforming  purely 
animal  wants,  and  in  developing  multitudes  of  higher 
desires. 

§  54.  Economics  is  not  directly  concerned  with  all 
the  possible  wants  of  man's  nature.  It  studies  only 
classification  those  wants  which  impel  him  to  exertion  in 
of  wants.  order  to  secure  a  living,  in  order  to  procure 
certain  material  objects,  or  certain  services  of  other  per- 
sons. In  a  rough  way,  therefore,  we  may  classify  the 
wants  with  which  economics  deals  as  (1)  wants  for  mate- 
rial objects,  and  (2)  wants  for  personal  services. 

But  a  further  classification  of  wants  will  be  of  use. 

We    may    divide   them    into    "  existence    wants "    and 

A  second        "  culture  wants."     The  first  class  comprises 

classification.  q\\  ^he   purely   animal   wants  ;   the   second 

includes  all  wants  for  those  things  which  lead  to  the 

refinement  and  ennobling  of  men's  lives. 

Many  of   the  wants  of  man's  animal  nature  are  for 
objects  necessary  to  the  continued  existence  of  families 
Existence        °f  human  beings  ;  others  are  for  objects  of 
wants.  relative   indifference,   so   far   as    the    mere 

preservation  of  life  is  concerned.  The  non-satisfaction 
of  necessary  wants  leads  to  physical  pain,  disease,  or 
death.  Hence  normal  persons  will  procure  the  objects 
necessary  for  such  needs  before  attempting  to  satisfy 
other  desires.  The  demand  for  such  "  necessaries  of 
life  "  will,  therefore,  remain  strong  and  fairly  constant 
even  if  other  satisfactions  have  to  be  given  up.  Another 
fact  should  also  be  noticed.  As  fast  as  the  lower  exist- 
ence wants  arc  appeased,  men  often  become  conscious  of 


HUMAN   WANTS.  83 

new  needs  and  desires,  which  they  now  have  an  oppor- 
tunity to  satisfy.  Progress  in  civilization  depends  upon 
the  awakening  of  such  higher  wants.  With  a  progress- 
ive people,  therefore,  the  'satisfaction  of  existence  wants 
serves  merely  to  arouse  new  desires,  and  to  stimulate 
men  to  attempt  to  satisfy  them. 

The  non-satisfaction  of  culture  wants  may  result  in 
a  loss  of  comfort,  of  pleasure,  or  of  social  esteem. 
These  wants  are  largely  acquired  ;  yet  the  culture 
force  of  habit  may  make  such  desires  very  wants. 
strong,  so  that  they  may  seem  to  have  almost  the  im- 
portance of  existence  wants.  To  people  in  one  social 
class,  expensive  clothes  or  a  private  carriage  may  seem 
a  decency  merely,  and  a  necessity  to  the  maintenance  of 
social  position  or  esteem.  To  other  people  such  objects 
may  be  luxuries,  and  may  seem  to  have  no  connection 
with  real  personal  welfare.  These  culture  wants,  there- 
fore, vary  greatly  according  to  individual  tastes  or  social 
position.  The  number  and  the  possible  variety  of  such 
wants  are,  moreover,  really  illimitable.  Existence  wants, 
are  far  less  expansive.  The  absolute  amount  of  nourish- 
ment, of  clothing,  or  of  shelter  which  a  person  requires 
is  limited  quite  narrowly,  and  cannot  be  greatly  in- 
creased. But  the  possible  varieties  of  fine  food  and 
clothing  are  very  many.  When  we  come  to  such  cul- 
ture wants  as  the  desires  for  books,  pictures,  foreign 
travel,  and  the  like,  the  possible  increase  in  the  abso- 
lute number  and  variety  of  human  wants  is  practically 
infinite.  These  wants  may  be  directed  toward  the 
development   of    one's   faculties   and   activities,   rather 


84  PRINCIPLES  OF  ECONOMICS. 

than  toward  the  satisfactions  of  the  senses.  A  thirst 
for  knowledge,  or  the  pursuit  of  literature  and  art  for 
their  own  sake,  may  have  for  their  objects  the  develop- 
ment of  faculties,  not  sensuous  gratification.  While 
the  awakening  and  the  satisfaction  of  culture  wants 
are  both  desirable  and  necessary,  if  life  is  to  be  made 
worth  the  living,  the  development  of  such  tastes  may  take 
undesirable  directions.  Luxurious  desires  may  be  car- 
ried too  far ;  and  the  constant  increase  of  wants,  even 
of  wants  desirable  in  themselves  may  lead  to  extrava- 
gance and  prodigality. 

II.  Economic  Goods. 
§  55.  Everything  which  satisfies  a  human  want  is  a 
utility  or  a  good.  The-ahstract  noun  futility  "  means  the 
utilities  power  to  satisfy^  \Van4;s.  Ecb^Ktinic^t^*^ 
or  goods.  0f  man's^e£Eprfs-to  suppTy^iinrself  with  cer- 
tain utilities,  or  goods.  These  ^utilities  may  oe  efth^r 
material  objects  or  personal  services.  To  such  goods 
the  term  "  wealth  "  is  applied.  In  common  usage  wealth 
often  means  great  riches,  but  such  is  not  the  sense  in 
which  the  economist  uses  the  word.  To  him  the  poor 
man's  dwelling  and  the  rich  man's  palace  are  alike 
wealth,  in  that  they  are  both  want  satisfiers,  or  utili- 
ties. Our  definition  of  goods  and  wealth  serves  to 
make  clear  one  very  important  point.  Nothing  can 
be  wealth  except  as  it  is  able  to  satisfy  a  human  want. 
The  conception  of  goods  or  wealth,  therefore,  is  purely 
relative  to  human  needs.  A  change  in  men's  wants 
may   render  much    former    wealth  valueless,  and    con- 


ECONOMIC   GOODS.  85 

verscly.  The  passing  away  of  the  belief  in  magic  made 
charms  and  relics  worthless,  while  varying  fashions  in 
dress  are  constantly  producing  similar  results. 

§  56.  It  is  necessary  now  to  give  a  more  exact  defi- 
nition to  the  term  "  economic  goods."  We  have  seen  that 
economic  goods  include  both  material  ob- 
jects and  personal  services,  but  not  all  such  g00ds- 
objects  or  services  come  within  the  scope 
of  the  definition.  Some  goods  exist  in  such  supera- 
bundance that  men,  without  making  any  effort  or  sac- 
rifice, find  all  wants  for  such  objects  completely  satisfied. 
Such  goods  are  free  to  all,  no  lack  of  them  is  ever  ex- 
perienced, and  they  are  not  objects  of  economic  effort. 
Air,  sunlight,  and  water  are  generally  examples  of  such 
free  goods.  But  many  other  things  can  be  secured  only 
by  effort  or  sacrifice  of  some  sort,  for  the  reason  that 
the  supply  of  such  utilities  is  limited.  Such  limitations 
may  be  due  to  the  impossibility  of  increasing  the  num- 
ber of  the  goods  in  existence,  as  in  the  case  of  old 
paintings  and  antiques;  or  to  the  fact  that  the  supply 
of  the  commodity  in  question  can  be  increased  only  by 
the  labor  of  production.  Utilities  of  which  the  supply 
is  limited,  as  compared  with  human  desires  for  them, 
are  called  economic  goods.  Men  never  experience  any 
lack  of  free  goods  since  all  their  wants  for  such  objects 
are  abundantly  supplied.  But  in  the  case  of  economic 
goods,  men  experience  constantly  unsatisfied  wants 
which  they  seek  in  some  manner  to  satisfy. 

Economic  goods,  since    they  are    limited  in  supply, 
can  be  obtained  as  a  rule  onlv  by  exertion  or  sacrifice 


86  PRINCIPLES   OF  ECONOMICS. 

of  some  sort.  For  that  reason  they  may  usually  be 
Transferabii-  exchanged  for  other  goods.  Material  ob- 
ity  of  econom-  iects  may  be  transferred  from  one  person 

ic  goods. 

to  another.  Man's  faculties  cannot  be  thus 
transferred,  but  the  services  which  his  faculties  enable 
him  to  render  may  be  exchanged  for  the  services  of 
others  or  for  material  objects.  In  so  far  as  the  ex- 
change or  transfer  of  personal  services  forms  a  part  of 
man's  economic  activities,  personal  services  must  be 
regarded  as  economic  goods. 

The  utility,  or  the  power  which  commodities  possess 
to  satisfy  our  wants,  may  arise  in  any  one  of  four  ways. 

The  object  mav  be   fitted,  as  for   example 

Elementary, 

form,  place,  pig  iron,  to  serve  as  the  raw  material  for 
utilities.  some  desirable  product.  Such  a  commod- 
ity possesses  elementary  utility.  Next, 
after  undergoing  changes  in  form,  the  pig  iron  may 
become  a  finished  product  adapted  for  man's  use ;  and 
may  then  acquire  form  utility.  Again,  when  trans- 
ported from  the  forge  or  rolling  mill  to  the  place  where 
some  consumer  may  make  use  of  it,  the  iron  product 
acquires  a  place  utility.  Finally,  some  commodities 
may  be  most  desirable  only  at  certain  times,  as  ice  in 
summer,  and  fuel  in  winter.  A  good  placed  before  the 
consumer  at  just  the  time  when  it  is  desired  will  possess 
a  time  utility. 

The   terms   "  utility "    and   "  good "  as  used   by  the 

economist  have  nothing  to  do  with  the  real 

desirability  or  moral  estimate  of  the  object 

in  question,  or  of  the  want  to  which  it  ministers.     Cer- 


CONSUMPTION  OF  WEALTH.  87 

tain  wants  may  be  undesirable  or  harmful  in  their  grati- 
fication ;  but  if  men  possess  such  wants,  and  demand 
such  undesirable  objects  for  consumption,  those  objects 
assume  economic  importance  and  must  be  considered 
economic  goods. 

III.    The  Consumption  of  "Wealth. 

§  57.  All  goods  are  produced  for  the  purpose  of  being 
consumed.  By  consumption  the  economist  means  the 
destruction  of   utilities.     This   takes    place 

The  consump- 

whcu  goods  are  used  up  by  consumers,  who  tionof 
apply  them  to  the  purposes  for  which  they 
were  designed.  Utilities  may  be  destroyed  also  by  the 
natural  decay  of  goods,  by  the  action  of  the  elements,  as 
in  floods  or  tornadoes,  or  by  wanton  waste  on  the  part 
of  man.  Usually  when  the  term  consumption  is  used, 
we  shall  refer  to  the  rational  destruction  of  utilities  in 
the  satisfaction  of  human  wants. 

It  is  important  to  note  the  difference  between  the 
consumption  of  durable  goods  and  the  consumption  of 
perishable   commodities.     A    book,  a   coat, 

1  Durable  and 

or  a  house  may  yield  a  large  number  of  perishable 
satisfactions  through  many  acts  of  repeated  s° 
use.  An  article  of  food  is  able  to  yield  but  a  single 
satisfaction  in  a  single  act  of  consumption,  and  may  be 
called  a  perishable  good.  The  book,  the  coat,  and  the 
house  may  be  considered  relatively  durable  goods,  which 
are  consumed  only  by  a  .series  of  acts  extending  through 
a  considerable  period  of  time.  Some  goods,  such  as 
land,  may  be  so  used   that  their  utility  may  never  be 


88  PRINCIPLES  OF  ECONOMICS. 

destroyed  ;  and  may,  therefore,  be  considered  absolutely 
durable  goods. 

The  consumption  of  wealth  tends  to  produce  positive 
pleasure  or  to  avert  pain.  The  pleasures  produced  or 
consumption  tne  Pams  averted  may  be  either  present  or 
and  production,  prospective,  but  they  are  the  usual  results 
of  acts  of  consumption.  The  production  of  utilities, 
on  the  other  hand,  necessitates,  in  most  cases,  some  pain 
or  hardship.  Disagreeable  labor  must  be  performed,  or 
desired  ease  be  given  up,  or  some  sacrifice  be  incurred. 
In  their  efforts  to  satisfy  wants,  men  are  constantly 
weighing  the  probable  pleasures  of  consumption  against 
the  sacrifices  necessary  for  the  production  of  consumable 
wealth.  A  man's  action  is  likely  to  take  that  direction 
in  which  he  considers  that  the  largest  balance  or  surplus 
of  pleasure  over  pain  can  be  obtained.  The  older  econo- 
mists expressed  this  by  saying  that  "  every  man  desires 
to  obtain  additional  wealth  with  as  little  sacrifice  as 
possible."  This  fact  will  guide  us  in  our  study  of  the 
consumption  of  wealth. 

§  58.    Human  wants  are  satiable.     If  a  person  con- 
sumes at  any  given  time  successive  units  or  portions  of  a 
commoditv,  he  finds  that  the  later  units  pro- 

The  law  of  J  '  l 

diminishing     duce  less  pleasure  or  satisfaction  than  the 

first.  If  enough  of  the  commodity  is  con- 
sumed, a  point  may  finally  be  reached  at  which  the 
consumption  of  any  more  units  ceases  to  produce  any 
satisfaction  whatever,  and  may  even  cause  pain.  This 
will  be  seen  if  we  suppose  a  man  to  be  supplied  with 
successive  pieces  of  bread      The  first  piece  might  serve 


CONSUMPTION  OF    WEALTH. 


89 


to  appease  the  pangs  of  extreme  hunger;  and  would, 
therefore,  have  a  very  high  degree  of  utility.  The 
second  piece  might  be  consumed  with  great  pleasure, 
but  it  would  not  have  the  same  intense  utility  that  the 
first  possessed.  A  third  piece  of  bread  might  completely 
satisfy  the  man's  desire  for  food  at  that  time,  so  that  a 
fourth  piece  would  have  no  utility  whatever  for  consump- 
tion at  that  moment.  In  this  case,  then,  the  second 
piece  of  bread  has  a  smaller  utility  than  the  first,  while 
the  third  has  less  than  the  second.  After  the  third 
piece  has  been  consumed,  the  point  of  satiety  is  reached. 

This  law  is  often  illustrated  by  the  follow-  illustration 
ing  diagram  :  — 


of  the  law 


In  this  diagram  the  lines  1  2,  2  3,  3  4,  4  5,  etc.,  represent 
eight  units  or  pieces  of  bread.     The   pleasure  derived 


90 


PRINCIPLES   OF  ECONOMICS. 


from  the  unit  first  consumed,  1 2,  may  be  infinitely 
great,  since  this  first  piece  may  be  necessary  to  preserve 
life.  The  second  unit,  2  3,  has  a  utility  measured  by  the 
perpendicular  line  3  b ;  and  the  parallelogram  erected 
upon  2  3  represents  the  utility  of  this  second  unit.  Each 
subsequent  unit  has  a  smaller  degree  of  utility,  repre- 
sented by  the  several  perpendicular  lines.  The  utility  of 
the  eighth  unit,  8  9,  is  nothing,  because  it  is  supposed 
that  the  point  of  satiety  is  reached  after  seven  units  are 
consumed.  Now  if  the  successive  units  are  made  very 
small,  the  diminishing  utility  of  the  commodity  may  be 
represented  by  a  curved  line,  as  in  the  following  figure : 


Here  the  utility  of  the  first  unit,  o,  is  infinite;  the  utility 
of  any  unit,  m,  is  represented  by  the  perpendicular  line, 
m  n  ;  while  the  last  unit,  x,  possesses  no  utility  whatever. 


CONSUMPTION  OF    WEALTH.  91 

We  must  now  distinguish  between  total  and  marginal 
utility.  Each  unit  of  the  supply,  until  the  point  of 
satiety  is  reached  at  x,  possesses  a  certain 

J  .  Total  and 

degree  of  utility  represented  in  our  diagram  marginal 
by  a  perpendicular  line  drawn  at  the  proper  u  y' 
point.  The  sum  of  the  utility  of  all  the  units  is  the 
total  utility  of  the  entire  supply,  ox.  On  the  other 
hand,  the  marginal  utility  is  the  utility  of  that  portion 
or  unit  of  the  supply  which  is  last  consumed.  In  our 
illustration,  x  is  the  marginal  unit  of  the  supply,  and 
the  marginal  utility  has  become  zero.  If,  however,  the 
supply  should  be  reduced  to  o  m  units,  m  would  be  the 
marginal  unit ;  while  the  marginal  utility  would  be 
represented  by  the  perpendicular  line  m  n. 

At  any  given  moment  it  is  safe  to  conclude  that  if  a 
person's   supply   of    any   commodity   is   increased,   the 
marginal  utility  of  the  commodity  will  de-  ..   . 
crease.      But   if   a   considerable   period   of  upon  me 
time  passes,  it  is  possible  that  the  person's  diminishing 
wants  may  expand,  so  that  a  larger  supply  utmty* 
at  the  later  period  may  have  as  great   a  marginal  utility 
as  a  smaller  supply  had  at  the  former  period.     When 
different  times  are  considered,  the  law  of  diminishing 
utility  must  be  used  with  a  great  deal  of  caution. 

§  59.  In  supplying  their  wants  men  consume  com- 
modities in  a  certain  order.  In  selecting  goods  for 
consumption    two    things    are    considered :  _ 

L  D  The  economic 

first,  the  utility  of  the  goods;   and  second,  order  of  con- 

,,  .c  sumption. 

the  cost  or  sacrifice  necessary  to  procure 

Uiem.     Those  commodities  will  be  selected  first  which 


92  PRINCIPLES  OF  ECONOMICS. 

yield  the  largest  surplus  of  enjoyment  above  the  neces- 
sary costs.  Suppose  bananas  and  oranges  to  be  offered 
for  sale  at  the  same  price,  say  twenty  cents  a  dozen. 
Then  a  person  who  prefers  bananas  to  oranges  will 
certainly  purchase  bananas.  They  have  for  him  a 
greater  utility  than  oranges  ;  and,  the  cost  being  the 
same,  will  yield  him  a  greater  surplus  of  utility  over 
costs.  But  now  suppose  that  the  person  buys  six 
bananas.  Then  it  is  probable  that  an  additional  half- 
dozen  would  have  less  utility  for  his  personal  consump- 
tion at  that  time  than  the  first  six  bananas  possessed. 
The  diminished  marginal  utility  of  the  larger  supply 
of  bananas  might  leave  a  smaller  surplus  of  utility 
over  costs  than  could  be  obtained  by  buying  a  half- 
dozen  oranges.  Hence  it  is  possible  that  he  may  buy 
six  oranges  instead  of  buying  an  additional  half-dozen  of 
bananas.  Now  let  us  assume  a  second  case.  Suppose 
that  the  person  prefers  oranges  to  bananas  ;  and  suppose 
that  an  orange  costs  five  cents,  while  bananas  happen  to 
be  selling  for  a  cent  apiece.  Under  such  circumstances, 
it  is  evident  that  the  greatest  surplus  of  utility  over 
cost  could  be  secured  by  purchasing  bananas  instead 
of  oranges,  unless  the  person's  preference  for  oranges 
should  be  great  enough  to  overcome  the  difference  of 
four  cents  in  the  cost  of  the  two  kinds  of  fruit.  Com- 
parisons of  this  sort  lie  at  the  basis  of  the  judgments 
formed  by  purchasers  in  a  market. 

a  second  Tliis  principle  may  be  illustrated  by  the 

illustration.     f0iiowj,Hr  diagram :  — 


CONSUMPTION  OF    WEALTH. 


93 


2 

9                         X' 

A                 4         6 

8              .T 

Commodity  1. 

—  Oranges. 

Commodity  2. 

—  Bananas. 

In  these  figures  the  lines  0  X'  and  A  X  represent  the 
entire  supply  of  the  commodities  1  and  2.  The  lines 
0  2,  0  9,  A  4,  A  6,  and  A  8  represent  various  amounts 
of  the  supply,  of  which  2,  9,  4,  6,  and  8  are  respec- 
tively the  marginal  units.  The  lines  OP,  2  L,  9 N, 
A  B,  ±H,  6  K,  and  8  31  represent  the  utility  of  the 
various  units  of  the  supply,  0,  2,  9,  A,  4,  6,  and  8. 
The  curved  lines  P  X'  and  B  X  represent  the  diminish- 
ing utility  to  a  particular  person  of  the  successive  por- 
tions of  the  supply.  The  lines  0  C,  2  E,  9  X,  A  2),  4  F, 
6  6r,  and  8  M  represent  the  cost  or  sacrifice  necessary 
to  secure  each  unit  of  the  supply.1  Then  the  lines  OP, 
EL,  D  B,  F II,  and  G-  K represent  the  surplus  of  utility 
over  cost  in  the  case  of  the  units   0,  2,  A,  4,  and  6 

1  For  convenience  of  illustration  wo  will  assume  the  cost  of  all  the 
units  to  he  the  same.  Then  the  continuous  lines  CN  and  DM  represent 
the  cost  of  all  units. 


94  PRINCIPLES   OF  ECONOMICS. 

respectively.  Now  the  person  in  question  Avill  select  a 
certain  number  of  units  of  commodity  2  first  of  all, 
since  the  first  units  of  this  commodity  possess  for  him 
the  larger  surplus  of  utility  over  cost.  He  will  not  pur- 
chase more  than  ^4.4  units  of  this  commodity,  however, 
before  he  finds  that,  beyond  the  marginal  unit  4,  ad- 
ditional units  would  yield  a  smaller  surplus  of  utility 
over  cost  than  the  first  units  of  commodity  1.  Simi- 
larly, the  person  would  not  buy  more  than  0  2  units  of 
commodity  1,  since,  beyond  the  marginal  unit  2,  a<Mi- 
tional  units  would  yield  a  smaller  surplus  of  utility  thai 
further  purchases  of  commodity  2  would  produce. 
Therefore  he  may  choose  additional  units  of  2  until, 
after"  reaching  the  unit  6,  the  surplus  of  utility  over 
costs  may  be  the  same  for  the  marginal  units  (2  and  6) 
of  each  commodity.  How  many  additional  units  of 
each  commodity  the  person  in  question  may  choose  to 
purchase  will  depend  upon  the  extent  to  which  his 
means  enable  him  to  gratify  his  wants.  In  any  case  he 
would  not  carry  his  purchases  beyond  the  points  of 
supply  represented  by  0  9  and  A  8.  At  these  points 
the  marginal  units  (9  and  8)  yield  no  surplus  of  utility 
over  sacrifice  ;  and  the  person  would  have  no  induce- 
ment to  make  additional  exertion  in  order  to  secure  an 
additional  supply  of  either  commodity. 

We  may,  therefore,  lay  down  these   two   principles 

concerning    the   order    in   which    commod- 
The  economic  ° 

order  of  con-   ities  will  be  selected   for  consumption  :  (1) 
Those  goods  will  be  first  procured  and  con- 
sumed which  yield  the  greatest  surplus  of  utility  over 


CONSUMPTION  OP    WEALTH.  95 

costs.     (2)  Iii  choosing  between  different  commodities 

each  person  will  endeavor  to  make  the  surplus  of  utility 

obtained  from  the  marginal  unit  of  one  commodity  equal 

to    that    obtained    from    every    other    marginal    unit. 

When  the  surplus  of  utility  over  costs  obtained  from 

the  marginal  unit  of  one  commodity  becomes  less  than 

could  be  obtained  from  one  or  more  units  of  a  second 

commodity,  the  second  commodity  will  be  purchased  in 

preference  to  the  first. 

Every  person,  in  the  management  of  his  expenses,  is 

constantly  making  such  estimates  of  the  comparative 

utility  and  the  comparative  cost  of  all  com- 

Caution. 
modities  which  he  purchases.     It  is  seldom, 

however,  that  judgments  can  be  made  with  the  exacts 
ness  presupposed  in  the  diagram  above  given.  We 
should  remember,  moreover,  that  different  persons  place 
very  different  estimates  upon  the  utility  of  the  same 
commodities.  This  makes  it  very  difficult  to  theorize 
concerning  the  utility  of  goods  to  the  general  purchasing 
public.  We  can  merely  observe  what  prices  other 
people  are  willing  to  pay  for  commodities,  and  then 
infer  from  these  prices  what  the  utility  of  the  commodi- 
ties is  considered  to  be. 

§  60.  Having  already  distinguished  between  total 
utility  and  marginal  utility,  we  must  now  notice  that 
our  estimates  of  the  importance  of  commodi-  The  important 

ties  for  the  purpose  of  consumption  always  of  a  good  de- 
pends upon  its 
depend  upon   the    marginal,  not   upon   the  marginal 

total  utility.     An  often  quoted  illustration  u    ^ 

will  make  this  clear.     A  peasant  has  put  aside  three 


96  PRINCIPLES   OF  ECONOMICS. 

sacks  of  corn  which  must  last  him  until  the  next  har- 
vest. One  sack  he  will  use  for  food  ;  a  second  must  be 
kept  for  seed ;  the  third  is  used  for  feeding  poultry,  which 
forms  a  pleasant  but  not  necessary  addition  to  his  diet 
What  will  be  the  utility  of  one  sack  of  corn  to  such  a  peas- 
ant ?  This  question  can  be  answered  by  inquiring  what 
the  peasant  would  lose  if  he  should  be  deprived  of  one 
sack  of  his  corn.  If  this  should  happen,  he  would  not  go 
without  food,  nor  would  he  be  likely  to  sacrifice  his  seed 
for  next  year's  crop.  Probably  he  would  sacrifice  the 
poultry,  since  they  represent  the  least  important  of  the 
three  classes  of  wants  to  which  the  three  sacks  of  corn 
minister.  It  appears,  then,  that  when  the  peasant's  sup- 
ply of  corn  amounts  to  three  sacks,  the  real  significance 
of  a  single  sack  is  measured  by  the  importance  of  the 
weakest  want  which  any  one  of  the  three  sacks  may  be 
used  to  satisfy. 

A  little  reflection  will  convince  any  one  that  all  our 
estimates  of  utility  are  based  upon  the  utility  of  the  last, 

or   marginal,  portion   of  the   supply.     The 
Summary. 

units  first  consumed  may  have  an  infinite 

utility.     Thus  the  first  portion  of  food  consumed  may 

save  us  from  starvation.     But  when  we  have  a  large 

supply  of  bread,  the  importance  of  any  single  piece  sinks 

to  the  level  of  the  marginal  or  last  piece  consumed, 

which  ministers  to  the  least  intense  want  which  bread 

can  satisfy.     If  our  supply  of  bread  should  exceed  our 

wants,  the  utility  of  a  single  piece  would  fall  to  zero. 

Therefore  the  marginal  utility  of  a  commodity,  or  the 

utility  of   the  marginal  unit  of  the  supply  of  a  com« 


CONSUMPTION  OF    WEALTH.  97 

modify,  determines  our  estimates  of  the  commodity's 
importance  for  purposes  of  consumption.  In  regard  to 
total  utility  it  may  be  well  to  add  that,  since  the  utility 
of  the  first  units  of  the  supply  oftentimes  is  infinite,  the 
total  utility  of  many  commodities  is  infinitely  great.  In 
no  cases  have  we  any  accurate  means  of  measuring  or 
comparing  total  utilities.  Final  utilities  we  are  able  to 
estimate,  first,  by  observing  the  final  utility  of  commodi- 
ties for  our  own  consumption  ;  and  second,  by  observing 
what  sacrifices  or  costs  other  people  are  willing  to  incur 
in  order  to  procure  different  classes  of  goods. 

§  61.  Some  commodities  are  in  the  form  of  finished 
products  ready  at  hand  for  consumption ;  others  are  in 
the  form  of  raw  materials  and  goods  not 
yet  ripe  for  consumption.  From  this  fact  JJJEJjJJl; 
arises  the  distinction  between  present  and 
future  goods.  This  distinction  is  of  importance  in  the 
theory  of  consumption.  Future  pleasures  and  pains  are 
usually  undervalued  in  comparison  with  present.  Goods 
which,  are  available  only  in  the  future,  or  which  min- 
ister to  future  not  to  present  wants,  are  regularly 
undervalued  in  comparison  with  present  goods.  The 
sum  of  one  hundred  dollars  obtainable  only  at  some 
future  date,  may  appear  less  desirable  than  a  sum  of 
ninety  dollars  which  is  immediately  available.  In  this 
way  future  goods  are  usually  discounted  when  compared 
with  present  satisfactions.  This  is  due,  not  merely  to 
the  uncertainty  of  all  future  events,  but  also  to  the 
fact  that  all  future  pleasures  and  pains,  however  certain 
they  may  be,  are  more  lightly  regarded  than  present 

7 


98  PRINCIPLES  OF  ECONOMICS. 

pleasures  and  pains.  Savage  peoples  are  proverbially 
heedless  of  the  future,  and  live  mainly  for  the  present 
enjoyment,  In  times  of  plenty  they  may  consume 
gluttonously  and  wastefully  the  very  food  that  may  be 
essential  to  the  preservation  of  life  at  a  later  time. 
Civilized  people  are  far  more  provident,  and  pay  far 
more  heed  to  future  needs.  Nevertheless,  the  tendency 
to  underestimate  the  future  still  remains. 

§  62.     It  is  well  to  distinguish  between   productive 

and  final  consumption.     All  goods  of  whatever  character 

are  intended  to  minister  ultimately  to  the 

Productive      satisfaction  of  some  human  wants.     When 

and  final 

consumption,  a  utility  is  destroyed  by  the  act  of  a  person 
who  derives  from  it  the  satisfaction  which 
it  was  intended  to  provide,  we  have  what  may  be  called 
an  act  of  final  consumption.  On  the  other  hand,  many 
goods  are  intended  to  serve  merely  as  raw  materials  for 
the  manufacture  of  finished  products,  or  as  tools  and 
machines  by  means  of  which  finished  products  may  be 
created.  Raw  materials  are  consumed  when  they  pass 
over  into  the  completed  commodity,  and  tools  and 
machinery  are  consumed  as  fast  as  they  are  worn  out 
by  constant  use.  All  such  destruction  of  materials  and 
machinery  may  be  called  productive  consumption.  Such 
goods  are  destroyed,  but  their  utility  reappears  in  the 
utility  of  the  finished  product.  Formerly  it  was  cus- 
tomary to  call  the  consumption  of  food  by  a  laborer 
productive  consumption,  since  it  enabled  him  to  produce 
more  goods  But  this  usage  exactly  reverses  the  fun- 
damental fact  that  consumption  is  the  end  of  all  eco- 


STATISTICS  OF  CONSUMPTION.  99 

nomic  activity,  while  production  is  merely  a  means  to 
that  end.  When  a  product  reaches  the  consumer  and 
is  consumed,  it  has  served  its  economic  purpose  ;  and  the 
economist  need  not  attempt  to  go  beyond  this  fact. 

IV.  Statistics  of  Consumption. 

§  63.    There  arc  now  available  figures  as  to  the  income 

and  expenditure  of  a  large  number  of  American  and 

European   families,    which    give    statistical 

.  Engel's  law. 

proof  of  the  facts  above  outlined  concerning 

the  order  of  consumption  and  the  relative  expansivity 

of  various  classes  of  wants.     First,  let  us  consider  the 

facts  demonstrated  by  Dr.  Engel,  an  eminent  Prussian 

statistician.     These   related   to   the   cost   of    living   in 

Prussia,  and  were  as  follows  :  — 

1.  As  the  income  of  a  family  increased,  a  smaller 
percentage  of  it  was  expended  for  food. 

2.  As  the  income  of  a  family  increased,  the  per- 
centage of  expenditures  for  clothing  remained  approxi- 
mately the  same. 

8.  With  all  the  incomes  investigated,  the  percentage 
of  expenditures  for  rent,  fuel,  and  light  remained  inva- 
riably the's^me. 

4.  As  the  income  increased  in  amount,  a  constantly 
increasing  percentage  was  expended  for  education, 
health,  recreation,  amusements,  etc. 

These  conclusions  were  drawn  from  the  following 
table  of  statistics  : 1 

1  See  Roscheh,  ii.  203;  Ely,  Economics,  244.  Dr.  Engel  "has  ad- 
vanced the  theory  that  it  might  be  possible  by  a  careful  study  of  a  Butri 


100 


PRINCIPLES   OF  ECONOMICS. 


Items  of  Expenditure. 


Subsistence 

Clothing 

Lodging 

Firing  and  Lighting    .... 
Education,  Public  Worship,  etc. 

Legal  Protection 

Care  of  Health 

Comfort,    Mental   and   Bodily 
Recreation 


Total 


Percentage  of  the  expenditure  of  the 
family  of 


A  man  with 
an  income  of 
•from  $225  to 
$300  a  year. 


100.0 


A  man  with 
an  income  of 
from  $4l>0  to 
$600  a  year. 


Per  cent. 
55.01 


18.0 
12.0 

5.0 

3.5  1 

2.0 

2.0 


2.5 


90.0 


1-10.0 


100.0 


A  man  with 
an  income  of 
from  $750  to 
$1000  a  year 


Per 

50.0 

18.0 

12.0 

5.0 

5.5' 

3.0 

3.0 

3.5 


cent. 
1 85.0 

I 

J- 15.0 


100.0 


§  64.    Subsequent  investigations  in  the  United  States 

and  in  Europe  show  the  substantial  accuracy  of  these 

investigations  statistics  by  Dr.  Engel.     Such  recent  inves- 

byreaeusaofor     tigations   are   summarized    in   the    Seventh 

Massachusetts  Annual  Report  of  the  United  States  Com- 

and  of  the 

united  states,  missioner  of  Labor,  opposite. 
These  statistics  show  that  about  nine  tenths  of  the 
income  of  very  poor  families  are  expended  for  the  satis- 
faction of  the  mere  existence  wants,  for  food, 
shelter,  and  clothing.     Nearly  half  of  the 
income  of  such  a  family  is  expended  for  food  alone.     As 
the  income  of  a  family  increases,  its  members  prefer  to 

dent  number  of  family  budgets  for  a  period  of  years  to  construct  a  sort 
of  social  signal  service.  His  idea  is  that  changes  in  total  expenditure  and 
in  expenditures  for  various  items  in  a  sufficient  number  of  typical  fami- 
lies could  enable  us  to  predict  the  coining  of  industrial  storms. " 


Conclusions. 


ECONOMY  IN   CONSUMPTION. 


101 


Percentage  of  Expenditure  for  Families  of  Different 
Incomes. 


Income 

Income 

Income 

Income 

Income 

sl-jm 
and  over. 

Object  of 

Income 
under 

$200. 

$300  and 

$500  and 

$700  and 

$900  and 

expenditure. 

under 

$400. 

under 

$600. 

under 

$800. 

under 

$1000. 

United  States. 

Per  cent. 

Per  cent. 

Per  cent. 

Per  cent. 

Per  cent. 

Per  cent. 

Rent 

15.48 

14.98 

15.15 

15.60 

14.96 

12.69 

Kuel 

7.07 

6.04 

5.63 

4.42 

4.00 

2.57 

Lighting  .... 

1.01 

.98 

.97 

.88 

.74 

.45 

Clothing  .... 

12.82 

14.14 

15.27 

10  33 

16.84 

15.71 

Food 

49.64 

45.59 

43.84 

38.89 

34.34 

28.63 

All  other  purposes 

13.98 

18.27 

19.14 

23.88 

29.12 

40.05 

Europe. 

Rent 

9  38 

11.93 

10.26 

9.49 

10.49 

Fuel 

5.38 

6.49 

3.32 

3.97 

5.19 

flighting  .... 

1.66 

159 

1.37 

1.20 

1.53 

Clothing  .... 

19.08 

14.18 

15.21 

18.97 

14.15 

Food 

48.32 

49.58 

50.06 

44.00 

46.24 

All  other  purposes 

16.18 

17.23 

19.78 

22.37 

22.40 

expend  a  constantly  increasing  proportion  of  their  means 
for  the  satisfaction  of  culture  wants.  The  desires  for 
food,  for  clothing,  and  for  shelter  are  seen  to  be  far  less 
expansive  than  the  higher  needs,  which  constantly  claim 
a  larger  portion  of  an  increasing  income.  Evidently,  as 
the  means  of  a  family  increase,  a  larger  surplus  of 
utility  over  costs  can  be  secured  by  reducing  the  pro- 
portion of  the  income  expended  for  existence  wants, 
and  by  diversifying  the  objects  of  family  consumption. 


V.  Economy  in  Consumption.    Saving  and  Investment. 

§  65.    By  economy  in  consumption  is  meant  securing 
the  greatest  amount  of  satisfaction  obtain-  Economyin 
able  from  a  given  expenditure  or  destruction  consumption, 
of  utilities.     This  necessitates  (1)  a  knowledge  of  the 


102  PRINCIPLES  OF  ECONOMICS. 

most  advantageous  uses  to  which  a  good  ma)7  he  devoted, 

and  (2)  economy  in  the  application  of  the  good  to  the 

chosen  purpose.     The   importance   of   such   a   rational 

ordering  of   our  consumption   is   well   expressed   by  a 

recent   French  writer   in   the   following   words :    "  The 

human  race  .  .  .  could  increase  its  welfare  almost  as 

much  by  a  better  ordering  of  its  consumption  as  by  an 

increased  production  of  wealth,  and  this  without  any 

real  retrenchment  in  consumption." 

It  is  highly  desirable  that  men  should  develop  their 

higher  wants,  and  should  have  the  means  of  maintaining 

a  high  standard  of  living.    Rational  economy 
Economy  and  °  °  J 

a  high  stand-  does  not  imply  the  non-satisfaction  of  desir- 
vmg.  a^je  wants,  but  rather  means  abstinence 
from  useless  or  injurious  expenditure,  and  the  most 
complete  utilization  of  the  goods  devoted  to  the  satis- 
faction of  necessary  and  worthy  desires.  These  aspects 
of  the  subject  of  economy  require  some  consideration. 

§  Q6.  Some  kinds  of  expenditure  produce  effects 
which  are  directly  pernicious  to  those  who  indulge  in 
injurious  such  forms  of  consumption.  Anything  of 
consumption.  ^]jjs  sor^  for  instance  intemperance,  unfits  a 
man  for  rendering  to  society  the  highest  service  of  which 
he  is  capable ;  and  is  condemned  in  advance  as  both 
wasteful  and  immoral.  More  need  not  be  said  here 
upon  this  topic. 

Other  kinds  of   consumption  are  not  in   themselves 

directly  pernicious,  but  may  nevertheless  be 

Luxury.         questionable.      Luxurious  expenditures  are. 

of  this  character.     Every  one  knows  that  extravagance 


ECONOMY  IN  CONSUMPTION.  103 

and  prodigality  exist,  and  the  careful  observer  will 
admit  that  these  evils  are  not  confined  to  any  single  so- 
cial class.  Yet  it  is  very  difficult  to  frame  any  general 
definition  of  luxury,  or  to  establish  any  general  prin- 
ciples by  which  what  is  commonly  termed  luxurious 
expenditure  may  be  judged.  We  must  admit  that  men 
of  great  genius  or  ability  have  much  greater  needs  than 
other  men,  and  that  they  may  wisely  incur  expenditures 
which  others  might  not  be  justified  in  making.  More- 
over, the  luxuries  of  one  time  may  become  decencies  or 
necessaries  of  the  succeeding  age.  As  Laveleye  says, 
"  A  shirt  for  the  body  and  a  chimney  in  the  house  were 
great  luxuries  in  the  Middle  Ages  ;  to-day  they  are  neces- 
sities even  for  the  poorest."  Furthermore,  it  seems 
probable  that  some  expenditures  that  might  be  called 
luxurious  tend  to  develop  finer  tastes  and  the  finer  arts, 
and  may  in  this  way  produce  beneficial  effects.  A  cer- 
tain amount  of  rational  luxury  is  not  to  be  indiscrimi- 
nately condemned. 

The  question  of  luxury  appears,  therefore,  to  be  a 
complicated  one ;  nevertheless,  it  is  possible  to  lay  down 
certain  general  principles.  First,  it  is  cer-  Test  for 
tain  that  there  exists  in  the  world  a  large  luxury- 
number  of  unsatisfied  wants  for  the  comforts,  and  even 
for  the  necessities,  of  life ;  in  other  words,  multitudes 
of  human  beings  are  destitute  of  the  means  for  satisfy- 
ing most  pressing  wants.  Every  luxurious  expenditure 
causes  a  sacrifice  of  the  means,  or  the  productive  power, 
available  for  the  satisfaction  of  other  wants.  The  money 
that  pays  for  the  millionaire's  palace  might  have  built 


104  PRINCIPLES   OF  ECONOMICS. 

an  orphan  asylum,  or  endowed  a  college.  Since  this  is 
the  case,  we  have  the  feeling  that,  in  any  instance  of 
luxurious  expenditure,  the  benefits  derived  from  the 
outlay  should  be  in  some  way  commensurate  with  the 
sacrifice  involved.  If  millions  of  dollars  are  lavished  in 
ostentatious  display  during  a  hard  winter,  when  multi- 
tudes of  people  are  on  the  verge  of  starvation,  we  feel 
that  there  is  an  immense  disproportion  between  the 
pleasure  actually  derived  from  such  expenditure  and 
the  possible  good  that  might  have  been  accomplished 
with  the  resources  thus  squandered.  While  the  law 
gives  to  every  one  the  undoubted  right  to  expend  his 
property  in  whatever  manner  he  may  desire,  yet  there 
exists  a  growing  feeling  that  the  possession  of  wealth 
imposes  upon  a  person  the  moral  obligation  of  admin- 
istering that  wealth  as  a  social  trust.  This  obligation, 
moreover,  is  as  binding  upon  the  possessors  of  small 
incomes  as  upon  those  who  enjoy  great  riches.  This 
feeling  was  expressed  by  Ex-mayor  Hewitt,  of  New 
York,  in  his  speech  at  the  recent  dedication  of  the  new 
buildings  of  Columbia  University.  Speaking  of  the 
university,  Mr.  %Hewitt  said :  "  It  will  not  lack  the 
means  of  usefulness,  nor  the  opportunity  of  expanding 
its  influence,  when  the  rich  men  of  our  city  realize  the 
opportunity  which  it  affords  for  making  the  millions 
which  they  control  fulfill  the  duty  imposed  by  the  pos- 
session of  wealth,  and  by  which  alone  its  possession  can 
be  justified."  On  these  principles,  luxurious  expendi- 
ture can  be  justified  only  when  its  results  are  propor- 
tionate to  the  sacrifice  involved.     Excessive  luxury  is 


ECONOMY  IN  CONSUMPTION.  105 

a  violation  of  the  moral  obligation  incumbent  upon  the 
possessor  of  wealth  to  administer  his  property  as  a  trust 
for  the  welfare  of  society. 

§  G7.  We  have  next  to  consider  the  question  of  econ- 
omy in  the  use  of  goods  devoted  to  the  satisfaction  of 
reasonable  and  desirable  wants.     Probably 

Economy  in 

more   loss  is  produced  by  wastefulness   in  the  application 

.,  .        ,  ,  .     .-I  •  j    ,  i        of  resources. 

this   department   than   is   caused  by  unde- 
sirable consumption.     Economy  in  productive  consump- 
tion will  be  treated  of  in  the  chapter  devoted  to  pro- 
duction.    At  this  point  we  shall  be  concerned  mainly 
with  economy  in  consumption. 

The  statistics  of  family  consumption  previously  pre- 
sented show  that  families  whose  incomes  range  from 
$200  to  $1200  per  year,  spend  from  60  to 

Economic  im- 

90  per  cent  of  their  incomes  for  the  ordi-  portanceof 
nary  household  expenses  of  rent,  food,  fuel,  ousekeePin8:. 
light,  and  clothing.  These  expenses  fall,  as  a  rule,  to 
the  direction  of  the  wife  and  mother.  Economy  in  the 
expenditure  of  from  60  to  90  per  cent  of  the  income 
of  the  ordinary  family  depends,  therefore,  mainly  upon 
the  skill  and  intelligence  of  the  women  who  administer 
the  affairs  of  the  household.  Here  "  a  penny  saved  is 
a  penny  earned,"  and  the  practice  of  household  economy 
has  been  hitherto  the  chief  economic  function  of  women. 
It  has  been  demonstrated  that  there   is 

Waste  in  con- 

a  great  deal  of  waste   in  family  consump-  sumption  of 
tion,  the  real  extent  of  which  is  not  at  all 
appreciated.      The  chief  item  of  loss  is  in  connection 
with  the  expenditures  for  food.     If  we  place  the  aver- 


106  PRINCIPLES  OF  ECONOMICS. 

age  income  of  an  American  family  at  8500,  —  and  it 
will  not  greatly  exceed  that  figure,  —  then  nearly  8250 
of  this  amount  is  expended  each  year  for  food.  Waste 
occurs  in  any  or  all  of  the  following  ways :  (1)  Need- 
lessly expensive  foods  containing  little  real  nutriment 
are  used ;  (2)  there  is  a  failure  to  select  the  foods  best 
suited  to  the  needs  of  the  family  ;  (3)  a  great  deal  is 
thrown  away  which  ought  to  be  utilized  ;  (4)  bad  prepa- 
ration of  the  food  causes  it  to  lose  much  of  the  nu- 
triment which  it  does  contain ;  (5)  badly  constructed 
ovens  diffuse  heat,  instead  of  confining  it,  and  cause 
enormous  loss  of  fuel.  We  shall  state  less  than  the 
truth  if  we  estimate  that  fully  one  fifth  of  the  money 
expended  for  food  is  absolutely  wasted,  while  the  excess- 
ive expenditure  often  fails  to  provide  adequate  nutri- 
tion. In  this  manner,  ten  per  cent  of  the  income  of  the 
average  family  is  uselessly  squandered.  This  means  a 
waste  of  850  out  of  each  family  income  amounting  to 
8500.1 

Destruction  by  fire  forms  another  enormous  item  of 
economic  waste.  Most  buildings  are  examples  of  what 
Mr.  Atkinson  2  calls  "  combustible  architec- 
ture," and  progress  in  slow-burning  or  fire- 
proof construction  has  been  very  slow.  The  methods 
of  insurance  companies  have  frequently  put  a  premium 
upon  incendiarism,  while  ignorant  or  willful  carelessness 


1  Sec  Atkinson,  The   Science  of  Nutrition;  Atwatet:,  Pood  Waste 
in  American  Households. 

2  See  Atkinson,  Slow-Burning  Construction,  <'ur  Enormous  Loss  by 
Fire  ;  also,  Thomson,  Waste  by  Fire. 


SAVING  AND  INVESTMENT.  107 

often  enough  completes  the  work  of  destruction.  In 
1886  the  property  destroyed  by  lire  in  the  United  States 
was  valued  at  #100,000,000.  Eight  years  later,  Mr.  At- 
kinson found  that  "  the  masters  of  combustible  architec- 
ture "  had  improved  upon  their  own  work,  and  that  the 
"  last  year's  ash  heap  of  the  United  States  "  represented 
property  worth  $150,000,000.  Further  illustrations  are 
not  needed  to  show  the  possibility  of  vastly  increasing 
the  satisfactions  enjoyed  by  our  people  without  increas- 
ing the  production  of  wealth  in  any  degree. 

§  68.  Having  treated  of  spending,  the  first  use  which 
can  be  made  of  acquired  wealth,  we  now  come  to  a  con- 
sideration of  saving,  the  second  use  to  which 
wealth  may  be  put.  Saving  involves  much 
more  than  the  mere  act  of  spending  less  than  one  re- 
ceives, and  its  ultimate  consequences  require  considera- 
ble explanation. 

Saving  may  take  the  form  of  merely  setting  aside  or 
storing  up  either  money  or  useful  commodities  in  such 
a  way  that  they  remain  idle.  This  is  called  two  forms 
hoarding,  and  may  or  may  not  be  a  useful  ofsavin&' 
and  necessary  way  of  providing  for  the  future.  In  early 
times,  or  in  periods  when  property  has  been  insecure, 
this  has  been  the  principal  way  in  which  saving  has 
been  effected.  Hoarding  may  be  carried  to  such  an 
extent  as  to  lead  to  scarcity  of  the  goods  offered  in  the 
market.  But  in  modern  times,  most  saving  takes  a 
second  and  very  different  form.  Nowadays  people  save 
wealth  mainly  by  investing  it  in  some  productive  enter- 
prise.    With  security  of  property  assured,  men  prefer  to 


108  PRINCIPLES  OF  ECONOMICS. 

invest  their  savings  in  productive  industry  rather  than 
to  hoard  surplus  wealth.  The  reason  is  that  a  perma- 
nent income  may  be  secured  in  this  way.  The  invest 
nient  may  be  made  directly  by  the  person,  or  indirectly 
through  a  bank,  to  which  the  work  of  investing  savings 
may  be  intrusted.  Investment,  evidently,  is  the  very 
opposite  of  hoarding.  It  does  not  withdraw  goods  from 
use,  but  invests  them  where  they  may  aid  to  increase 
future  production;  While  to  some  extent  hoarding  still 
takes  place,  for  the  most  part  saving  means  useful  in- 
vestment, and  not  withdrawal  of  wealth  from  use. 

Let  us  compare  the  results  of  saving  and  spend- 
ing. The  French  economist  Leroy-Beaulieu  has  con- 
saving  and  trasted  the  two  as  follows :  "  The  man 
spending.  w]10  saves,  in  case  he  invests  his  savings 
directly  or  indirectly,  spends  as  much  and  makes  as 
much  work  as  the  prodigal,  or  the  man  who  spends 
his  entire  income.  But  the  object  and  the  result  of  the 
spending  and  the  work  are  different."  Saving,  "  in 
place  of  making  work  for  upholsterers,  hair  dressers, 
lace  makers,  meat  cooks  or  pastry  cooks,  makers  of  fine 
carriages,  etc.,  makes  work  for  masons,  ballasters,  vine- 
dressers, machine  builders,  and  other  workers  of  the 
same  sort."  Saving,  then,  usually  means  spending;  but 
it  means  spending  for  the  future,  not  for  the  present. 
Saving  means,  therefore,  not  a  decrease  in  the  demand 
for  commodities  ;  but  usually  a  demand  for  future  goods 
instead  of  present  goods,  for  the  tools  and  materials 
necessary  to  future  production  rather  than  for  the  prod- 
ucts of  present  or  past  industry. 


SAVING  AND  INVESTMENT.  109 

Our  analysis  of  the  results  of  saving  enables  us  to  see 
at  once  the   absurdity  of  the    idea   that   reckless    and 
wasteful   expenditure  can   be  approved   be-  "spending 
cause  it  makes  trade  good.     Saving  makes  mofey*° 

D  °  make  trade 

trade  good  and  causes  a  demand  for  prod-  good." 
nets  just  as  truly  as  does  spending.  But  spending 
inconsiderately  leads  to  the  destruction  of  utilities ; 
saving,  to  the  ultimate  increase  of  production.  Yet 
many  intelligent  people  and  many  important  news- 
papers often  excuse  extravagance  and  profusion  on  the 
ground  that  they  make  trade  good,  and  give  employment 
to  labor. 

Two  reasons  make  saving  a  desirable  habit  in  any 
people.  First,  it  cannot  be  repeated  too  often  that  the 
first  economic  duty  of  every  man  is  to  make  Desirability 
himself  a  self-supporting,  independent  mem-  °f  saving, 
ber  of  society.  In  order  to  do  this  it  is  necessary  to 
save  the  means  for  supporting  one's  self  in  times  of  sick- 
ness or  lack  of  employment,  and  also  to  make  provision 
for  old  age.  Saving  may  also  be  necessary  in  order  to 
maintain  the  unity  of  the  family  upon  the  death  of  the 
father.  But  a  second  powerful  reason  makes  saving 
a  desirable  thing.  Modern  economic  life  depends  upon 
the  extensive  use  of  capital  in  production.  Through  the 
means  of  capital,  man  is  gradually  subjugating  nature 
and  substituting  natural  forces  for  human  labor.  Eco- 
nomic progress  demands  the  constant  creation  of  new 
capital,  and  capital-formation  involves  a  willingness  to 
prefer  future  goods  to  those  which  contribute  alone  to 
present  enjoyment. 


110  PRINCIPLES  OF  ECONOMICS. 


VI.     Demand. 

§  69.   We  have  seen  that  human  wants  are  the  cause 

of  man's  economic  activities.     Human  wants   create  a 

demand  for  certain  commodities  and  services 

Demand. 

which  can  be  secured  only  through  labor  or 
sacrifice  of  some  sort.  In  order  to  meet  such  a  demand 
for  commodities  and  services,  all  economic  activities  are 
directed.  It  will  be  well  to  close  this  chapter  by  a 
general  statement  of  the  law  of  demand. 

Since  human  wants  are  satiable,  a  single  unit  of  any 
commodity  will  possess  for  any  person  or  group  of  per- 
sons a  degree  of  utility  that  constantly  de- 
Demand  and 
satiable         creases  as  the  supply  of  the  commodity  is 

increased.  At  any  moment,  moreover,  the 
importance  which  men  will  attach  to  any  single  unit  of 
the  supply  will  depend  upon  the  utility  of  the  last  or 
marginal  unit.  Men  will  demand  first  those  commodi- 
ties whose  marginal  utility  most  exceeds  the  cost  or 
sacrifice  necessary  to  obtain  them.  They  will  cease  to 
demand  any  commodity  as  soon  as  its  marginal  utility 
ceases  to  exceed  its  cost. 

In  obtaining  desired  commodities  we  are  commonly 

called  upon  to  sacrifice  money,  and  we  need  to  base  our 

L  statement  of  the  law  of  demand  upon  this 

'V,     measured       fact.     Money  confers   upon  its    possessor  a 

by  money.  .  ,  .         f 

general  purchasing  power,  and  a  unit  ot 
money  has  to  each  individual  a  certain  importance  based 
upon  its  ability  to  procure  satisfactions  of  all  sorts.  A 
man  with  an  annual    income  of  $500  knows  that   one 


DEMAND.  Ill 

dollar  represents  one  five-hundredth  part  of  his  total 
power  each  year  to  purchase  commodities.  The  signifi- 
cance of  a  dollar  to  a  rich  man  is  generally  much  less 
than  its  importance  to  a  poor  man.  As  a  person's 
supply  of  money  increases,  the  marginal  utility,  or  want- 
satisfying  power  of  the  marginal  unit,  of  money  con- 
stantly tends  to  become  smaller.  Nevertheless,  every 
one  has  a  certain  general  idea  of  the  importance  to 
himself  of  the  general  purchasing  power  represented  by 
a  dollar ;  and  every  one  is  constantly  called  upon  to 
estimate  the  sacrifice  which  the  expenditure  of  a  dollar 
may  involve.  We  may  say,  therefore,  that  demand  is 
determined  by  a  comparison  of  the  marginal  utility  of 
commodities  with  the  marginal  utility  of  money.  Men 
purchase  those  commodities  whose  marginal  utility 
most  greatly  exceeds  the  marginal  utility  of  the  money 
required  to  purchase  them. 

§  70.    We  call  the  demand  for  a  commodity  large  or 
small    as    the    number    of   units   of    that     commodity 

demanded  by  the  public  is  larger  or  smaller. 

J  r  °  The  general 

Now  the  extent  of  demand  will  vary  accord-  law  of  de- 

ing  to  changes,  (1)  in  the  marginal  utility 

of  the  commodity,  (2)  the  money  cost,  and  (3)  in  the 

means  or  wealth  of  the  purchasers  or  consumers.     This 

may  be  illustrated  by  the  three  following  cases  :  — 

1.  If  the  price  of  sugar  remains  unchanged,  say  ten 

cents  per  pound,  then  the  number  of  pounds  that  will 

be  demanded  will   depend    solely   upon   the   utility   of 

sugar.     At  one  time  it  may  be  that  consumers  will  use 

10,000  pounds  of  sugar  before  the  marginal  utility  of  a 


112  PRINCIPLES   OF  ECONOMICS. 

single  pound  falls  so  low  that  no  one  would  care  to 
sacrifice  ten  cents  in  order  to  purchase  an  additional 
pound.  Now  if  tastes  change,  it  may  happen  that  con- 
sumers will  buy  15,000  pounds  before  the  marginal 
utility  of  a  single  pound  falls  below  ten  cents. 

2.  On  the  other  hand,  let  us  suppose  that  the  utility 
of  sugar  remains  unchanged.  At  a  price  of  ten  cents 
a  pound,  we  have  seen  that  10,000  pounds  will  be 
demanded  by  the  consumers.  Now  if  the  price  Jdo 
reduced  to  five  cents  a  pound,  the  number  of  pounds 
demanded  may  increase  to  15,000.  The  reason  for  this 
increased  demand  is  that  the  reduction  in  the  marginal 
utility  of  a  pound  of  sugar,  caused  by  the  increase  of  the 
supply  to  15,000  pounds,  is  offset  by  the  reduction  in 
cost  or  sacrifice.  The  reduced  cost  leaves  a  surplus  of 
utility  over  sacrifice,  although  the  marginal  utility  has 
decreased. 

3.  Suppose,  finally,  that  both  the  marginal  utility  of 
sugar  and  the  price  remain  the  same,  but  that  the  wealth 
of  the  consumers  is  increased.  Then  the  marginal 
utility  of  the  five  cents  required  to  purchase  a  pound  of 
sugar  will  decrease  for  the  majority  of  the  consumers. 
Under  such  circumstances  more  than  15,000  pounds 
may  be  purchased  before  the  marginal  utility  of  a  pound 
of  sugar  falls  below  the  marginal  utility  of  five  cents. 
Thus  the  increase  in  the  wealth  of  the  consumers  may 
serve  to  increase  the  demand  for  sugar  to  20,000  pounds 
at  the  price  of  five  cents  a  pound.  It  would  have  exactly 
the  same  effect  as  a  decrease  in  the  price. 

§  71.   The  law  of  demand  may  be  summed  up.     First} 


DEMAND.  113 

the  demand  for  any  commodity  will  vary  directly  as  its 
marginal  utility,  the  cost  being  assumed  to 

.  ~  .  Summary, 

remain   the    same.      /Second,   assuming    the 

utility  to  remain  the  same,  demand  will  vary  according 
to  the  price.  Third,  changes  in  the  wealth  of  the  con- 
sumers act  exactly  like  changes  in  price.  An  increase 
of  wealth  lowers  the  marginal  utility  of  money  and 
increases  demand,  while  a  decrease  of  wealth  has 
precisely  the  contrary  effect. 


114  PRINCIPLES  OF  ECONOMICS. 


LITERATURE  ON/  CHAPTER  IV. 

General  References  :  Andrews,  Institutes  of  Economics,  79- 
82,  190-199;  Ely,  Outlines  of  Economics,  219-246;  Laveleye, 
Political  Economy,  243-263 ;  Marshall,  Economics  of  Industry, 
71-101,  Principles  of  Economics,  159-213;  Roscher,  Political 
Economy,  I.  51-58,  II.  183-269 ;  "Walker,  Political  Economy, 
292-329. 

Special  References  :  Hearn,  Plutology,  12-23.  A  suggestive 
treatment  of  the  subject  of  human  wants. 

Jevons,  Theory  of  PoliticalEconomy,  28  et  seq.  Treats  of  law  of 
diminishing  utility.  Compare  with  Jevons  either  Wieser,  Natural 
Value,  3-36,  or  Smart,  Introduction  to  Theory  of  Value,  9-33. 

Patten,  The  Consumption  of  Wealth ;  Dynamic  Economics, 
39-49.  These  books  are  difficult  to  read,  but  are  very  suggestive. 
Consult  them  especially  on  the  subject  of  the  economic  order  of 
consumption. 

Say,  Treatise  on  Political  Economy,  Bk.  III.  One  of  the  earli- 
est discussions  of  consumption. 

Seventh  Annual  Report  of  the  United  States  Commissioner  of 
Labor,  II.  860-865;  Gould,  Social  Condition  of  Labor.  These 
-works  give  statistics  of  the  actual  consumption  of  families. 

Atkinson,  The  Science  of  Nutrition ;  Slow  Burning  Construc- 
tion ;  Our  Enormous  Loss  by  Fire.  Mr.  Atkinson  has  given  much 
attention  to  wastes  in  cooking  and  by  fires. 

Atwater,  Food  Waste  in  American  Households. 

Thomson,  Waste  by  Fire. 


PRODUCTION.  115 


CHAPTER  V. 

THE   PRODUCTION    OP   WEALTH. 
I.   Production  in  General. 

§  72.  The  production  of  wealth  does  not  mean  the 
creation  of  material  things  which  did  not  previously 
exist.  Human  powers  are  unable  to  create  Defillition  of 
matter,  and  the  utmost  that  man  can  do  production, 
is  to  produce  utilities.  Production,  therefore,  means 
changing  the  form  or  the  relations  of  matter  so  that  it 
becomes  better  able  to  satisfy  human  wants.  Wood  or 
iron  may  be  changed  into  the  form  of  houses  or  ma- 
chines ;  seeds  may  be  placed  in  the  ground  where  natural 
forces  act  upon  them  and  result  in  the  growth  of  plant 
life ;  Dakota  wheat  may  be  transported  to  Liverpool, 
gaining  increased  utility  by  the  change  of  place  ;  but 
in  all  such  cases  material  objects  and  natural  forces  are 
merely  so  adjusted  that  they  acquire  a  new  power  to 
satisfy  wants.  Production  may  be  defined,  therefore, 
as  "  the  creation  of  utilities  by  the  application  of  man's 
mental  and  physical  powers  to  the  physical  universe, 
which  furnishes  materials  and  forces."  1 

Every  increase  of  utilities,  however,  is  not  the  result 
of  human  activities  directed  expressly  for  that  purpose. 

1  See  Ely,  Outlines  of  Economics,  90. 


116  PRINCIPLES  OF  ECONOMICS. 

We  have  seen  that  changes  in  human  wants  and  tastes 

may  increase  the  want-satisfying   power  of   goods,  or 

may  destroy  it.      The  utility  of  a  piece  of 

tion  which  is  land  may  be  increased  by  the  natural  growth 

'  of  the  community,  when  no  labor  is  exerted 

directly  to  increase  the  usefulness  of  the  particular  tract 

of  ground.     Various  accidents  which  in  no  way  result 

from  human  effort  may  suddenly  increase  the  utility 

of  many  kinds  of  wealth.     All  such  ways  of  creating 

utilities  are  not  to  be  considered  economic  production. 

It  has  sometimes  been  thought  that  some  forms  of 

industry  are   more  productive   than   others.      But   our 

analysis  of  the  nature   of    production   has 

Productivity  r 

of  various       shown  us  that  the  farmer,  the  manufacturer, 

the  railroad  employee,  and  the  merchant 
are  all  alike  engaged  in  rearranging  or  adjusting  mate- 
rials in  such  a  way  that  an  increase  of  utility  results 
from  their  labors.  The  manufacturer  and  the  railroad 
engineer  are  assisted  by  natural  forces  to  the  same 
extent  as  the  farmer.  Moreover,  such  workers  as 
teachers,  doctors,  lawyers,  judges,  policemen,  soldiers, 
domestic  servants,  and  the  like,  directly  contribute  to 
the  increase  of  utilities,  and  should  be  considered  pro- 
ductive laborers.  All  useful  labor  is  productive  of 
increased  enjoyment,  that  is,  of  increased  utilities.  Only 
misdirected  or  inefficient  labor  is  unproductive. 

§  73.    The    labor   of    production    involves    a    certain 

Production      amount  of  toil  which  may  be  more  or  less 

and  sacrifice,  disagreeable,  or  even  painful,  according  to 

circumstances.     Some  kinds  of  labor,  as  the  labor  of  the 


PRODUCTION.  117 

scholar  or  of  the  artist,  may  appear  to  be  pleasurable  in 
themselves.  But  in  most  such  cases  it  will  be  found 
that  the  pleasure  comes  from  the  results  of  the  labor, 
rather  than  from  the  bodily  and  mental  exertion.  For 
the  majority  of  producers,  labor  involves  bodily  fatigue 
or  even  pain,  and  also  the  sacrifice  of  desired  leisure 
and  enjoyments.  So  true  is  this  that  it  is  claimed  with 
reason  that,  if  the  fear  of  starvation  and  want  should 
be  removed,  most  men  would  not  feel  any  incentive 
sufficient  to  induce  them  to  carry  on  the  labor  of  pro- 
duction. It  should  be  emphasized  that  a  certain  amount 
of  well-directed  labor  is  a  necessary  discipline  for  man- 
kind, and  that  "  an  idle  brain  is  the  devil's  workshop." 
When  all  is  said,  however,  the  fact  remains  that  pro- 
duction necessitates  sacrifice.  On  account  of  this,  men 
are  constantly  seeking  to  produce  wealth  with  less  labor. 
This  effort  to  economize  labor  is  one  of  the  principal 
forces  that  lead  to  economic  progress. 

Practically  all  production  requires  a  certain  amount 
of  time.     Many    weeks   have   to  elapse   between   seed- 
time  and  harvest,  several  months  may  be  pro,^^ 
required  to  convert  trees  into  a  house,  while  requires  time, 
many  years  may  pass  before  the  construction  of  a  rail- 
road or  a  canal  can  be  completed. 

§  7-4.  A  treatment  of  economic  production  should 
include  a  discussion  of  the  production  of  each  of  the 
two  kinds  of  economic  goods,  namelv,  mate- 

°  -  The  produc- 

rial  goods  and  personal  services.     Yet  a  few  tionofper- 

i  ■,  11-t  •  i    sonal  services, 

words  only  need  be  said  concerning  personal 

services.     The  first  wants  which  any  society  must  sat- 


118  PRINCIPLES  OF  ECONOMICS. 

isfy  are  the  wants  for  subsistence  and  shelter.  At  an 
early  period  certain  personal  services  will  be  desired ; 
and  soldiers,  lawgivers,  priests,  and  domestic  servants 
may  appear  in  any  society.  The  demand  for  personal 
services  will  be  likely  to  increase  as  fast  as  the  industry 
of  any  people  becomes  more  productive,  so  that  a  smaller 
proportion  of  the  total  population  has  to  be  employed 
in  the  production  of  material  goods.  The  general  ten- 
dency of  economic  progress  is  to  enable  a  smaller 
number  of  workers  to  produce  the  material  wealth 
necessary  for  civilized  life,  and  to  set  free  a  larger 
number  of  people  to  render  personal  services  of  all 
sorts. 

II.   The  Factors  of  Production. 

§  75.    Economists   have  recognized   three   factors  of 

The  three        production,  —  nature,    man    or    labor,    and 

factors.  capital.     Man  and  nature    are   original    or 

primary  factors,  while  capital  is  a  secondary  or  derived 

factor. 

§  76.   In  a  general  way  nature  may  be  said  to  assist  in 

production  by  furnishing  man  with  standing-room,  with 

materials,  and  with  chemical  and  physical 

Nature  as  a 

factor  of         forces.    Tho  motor  forces  of  nature  have  been 
production.     ulili/cd  by  man  principally  in  the  forms  of 

the  muscular  strength  of  animals,  the  motive  force  of 
winds  and  streams,  the  expansive  force  of  steam,  and  the 
motive  force  of  electricity. 

A  detailed  classification  of  nature's  contributions  to 
production  may  next  be  presented.    First,  all  productive 


FACTORS  OF  PRODUCTION.  119 

industry  may  be  influenced  by  atmospheric  or  climatic 
conditions.  These  affect  not  only  the  animal  and  vege- 
table   productions   of     a  country,  but   also  „,    ,„   „ 

t  r  J  '  Classification 

the  vigor  and  character  of  the  inhabitants,  of  nature's 

cy  ,  ,   ,  ,  i        t  i    i        contributions. 

/Second,  rivers,  lakes,  and  seas  should  be 
mentioned.  These  may  facilitate  the  transportation  of 
persons  and  products ;  and  may  furnish  man  with  fish, 
corals,  sponges,  etc.  Rivers  may  also  supply  the  water 
power  that  turns  the  wheels  of  many  productive  indus- 
tries. Third,  we  must  notice  the  contributions  of  the 
land  surface  of  the  earth.  The  land  contributes  to 
production  standing-room,  plants  and  animals,  mineral 
treasures  hidden  for  the  most  part  below  the  surface, 
and  the  mineral  and  vegetable  elements  that  form  fer- 
tile soils.  Mere  situation  is  often  of  the  greatest  im- 
portance, as  is  seen  in  the  case  of  a  city  or  country 
located  at  an  important  point  along  the  routes  which 
the  commerce  of  the  world  is  obliged  to  follow. 

Of  the  contributions  of  nature  to  production  some  are 
appropriable,  while  others  practically  cannot  be  reduced 
to  ownership  by  individuals  or  by  societies,  some  of  na- 
Land  is  appropriable,  as  well  as  the  products  D^ons  a^" 
secured  from  the  land.     Air  and  sunlight  are  appropriable, 
for  all  practical  purposes  not  appropriable,  except  in  so 
far  as  the  enjoyment  of  them  may  depend  upon  access  to 
certain  pieces  of  land.    The  waters  of  the  earth's  surface 
cannot  be  appropriated,  except  in  cases  where  access  to 
them  depends  upon  the  control  of  land.     Inland  waters 
and  the  borders  of  the  ocean  to  the  extent  of  three  miles 
seaward  are  appropriated   by  the  nations  that  control 


120  PRINCIPLES   OF  ECONOMICS. 

adjacent  territory.  The  appropriable  contributions  of 
nature  are  actually  reduced  to  private  ownership  as 
soon  as  they  become  scarce  relatively  to  human  wants. 
When  population  is  scanty,  and  men  lead  a  nomadic  life, 
land  is  not  held  as  private  property.  But  as  numbers 
increase,  and  unoccupied  land  becomes  scarce,  the  soil  is 
brought  under  private  ownership. 

Some  writers  have  attempted  to  explain  the  whole  of 

man's  social  as  well  as  his  economic  life  by  reference  to 

innuenceof     the  influence  of  the  natural  surroundings  of 

nature  upon        ^  commimity.     In  this  wav  it  is  said  that 

man's  eco-  J  * 

nomiciife.  the  inland  plains  give  rise  to  a  pastoral  form 
of  economic  life,  that  the  seashore  causes  people  to  live 
as  fishermen,  and  that  forests  produce  the  tribes  of 
hunters.  From  the  natural  affiliation  or  combination  of 
these  three  forms  of  simple  economic  societies,  all  com- 
plex or  civilized  societies  are  derived.  But  such  a  view 
exaggerates,  as  it  is  very  easy  to  do,  the  extent  to  which 
natural  surroundings  determine  the  life  of  a  people  ;  and 
it  neglects  the  fact  that  man  in  a  thousand  ways  may 
modify  his  environment.  Man  can  reclaim  land  from 
the  sea,  can  irrigate  arid  lands,  can  tunnel  the  Alps,  and 
can  construct  a  railroad  through  the  Rocky  Mountains 
or  across  the  Andes.  The  economic  development  of  our 
own  country  has  been  very  greatly  influenced  by  natural 
conditions.  The  infertility  of  the  soil  of  New  England 
compelled  thai  section  to  utilize  its  forests  for  ship  build* 
ing,  and  its  rapid  streams  for  power  for  manufacturing. 
The  fertile  soil  of  the  South  marked  that  section  out  as 
an  agricultural    region.     The  rivers  of  the  Mississippi 


FACTORS  OF  PRODUCTION.  121 

Valley  helped  to  extend  settlements,  and  to  facilitate  the 
rapid  growth  of  the  interior  of  our  continent.  In  general, 
it  may  be  said  that  the  tendency  of  economic  progress  is 
to  free  man  more  and  more  from  the  influence  of  nature. 
It  took  nearly  two  hundred  years  for  English  colonists 
to  advance  their  settlements  from  the  Atlantic  coast  to 
the  valley  of  the  Mississippi.  But  the  steamboat  and  the 
railroad  enabled  the  people  of  the  United  States  to  spread 
over  the  territory  between  the  Alleghanies  and  the  Pacific 
in  three  quarters  of  a  century. 

§  77.  Labor  is  human  exertion  or  effort  directed  toward 
the  creation  of  economic  goods.  It  is  possible  to  distin- 
guish between  physical  and  mental  labor.  Labor  a  factor 
In  so  doing  one  should  remember  that  even  of  Production. 
the  rudest  manual  labor  requires  a  certain  amount  of  men- 
tal effort,  however  slight ;  while  mental  labor  may  require 
the  use  of  the  eye,  the  ear,  the  tongue,  and  always  of  the 
brain.  Between  the  work  of  the  ditch  digger  and  that 
of  the  philosopher  there  may  be  endless  varieties  and 
degrees  of  activity  ;  but  all  kinds  of  labor  involve  both 
physical  and  mental  exertion,  and  differ  from  each  other 
only  in  the  degree  in  which  the  mental  or  the  physical 
elements  predominate. 

It  will  be  found  useful  to  classify  the  different  forms 
of  labor,  as  follows  :  — 

1.  Discovery  and  invention. 

2.  Occupation,  or  the  procuring  of  the  gifts   Classification 

of  nature;  e.  q.,  gathering  wild  plants,  hunting  of  different 

'        y  '  °  '  p    kinds  of  labor. 

wild  animals,  extracting  minerals  from  the  earth. 

3.  Production    of   materials  by   utilizing    natural    forces 


122 


PRINCIPLES  OF  ECONOMICS. 


so  as  to  produce  changes  of  form;  e.  g.,  agriculture,  stock 
breeding. 

4.  Manufacture,  or  transforming  raw  materials  into  useful 
products. 

5.  Transportation  of  commodities  and  persons.  Place 
utilities  are  produced  in  this  way. 

6.  Exchanging  products  and  services.  All  kinds  of  com- 
mercial enterprises  are  included  here. 

7.  Organizing  and  superintending  productive  industries. 
An  efficient  organizer  and  superintendent  is  the  most  useful, 
hence  most  productive,  man  in  a  factory. 

8.  Prevention  of  loss;  e.  g.,  firemen,  lighthouse  keep- 
ers, etc. 

9.  Rendering  personal  services  of  an  economic  character. 
This  includes  domestic  servants  at  one  extreme  and  members 
of  the  learned  professions  at  the  other.  Those  persons  who 
make,  interpret,  and  enforce  laws  are  also  included.  Such 
services  are  productive  directly  of  utilities  which  have  an 
economic  significance.  Indirectly  they  may  lead  to  a  great 
increase  of  material  wealth ;  e.  g.,  the  services  of  the  scientist 
or  educator. 

The  last  two  censuses  of  the  United  States  showed 
that  the  workers  of  this  country  were  distributed  among 
the  various  occupations  as  follows  :  — 


Occupations. 


Agriculture 

Personal  and  Professional  Services    .     . 

Trade  and  Transportation 

Manufacturing,  Mechanical,  and  Mining 
Industries 


Total  Persons  in  Gainful  Occupations 


1S80. 


7,070,493 
4,074,288 
1,810,256 

3,837,112 


17,302,099 


1890. 


8,460,251 
5,304,829 
3,325,962 

5,038,619 


22,735,061 


FACTORS  OF  PRODUCTION.  12:1 

Tlic  labor  of  production  involves  sacrifice,  and  even 

pain.     Yet  labor  is  a  necessity,  for  without  it  "  mankind 

would  necessarily  perish  oft'  the  face  of  the  _ 

J    L  Economic 

globe  even  if  all  soils  were  fertile  and  all  importance 
climates  temperate."  Labor  is  not,  how- 
ever, an  end  in  itself,  but  merely  a  means  to  the  end  of 
satisfying  human  wants.  Many  persons  often  act  on  the 
principle  that  whatever  makes  work  for  men  to  do  is  a 
blessing,  and  whatever  lessens  labor  is  an  injury.  From 
the  point  of  view  of  the  workman  directly  affected  by  it, 
a  labor-saving  machine  is  often  regarded  as  an  enemy ; 
but  from  the  point  of  view  of  the  general  public,  cheaper 
methods  of  production  arc  a  very  desirable  thing. 

The  efficiency  of  a  laborer  depends,  first,  upon  his  indi- 
vidual characteristics,  and,  second,  upon  the  wisdom  with 
which  his  labor  is  employed  and  directed,  —  llie  efficiency 
that  is,  upon  industrial  organization.  Post-  of1*001-- 
poning  for  a  time  the  second  factor,  we  will  now  consider 
individual  endowments  and  abilities  as  causes  affecting 
the  efficiency  of  labor.  In  this  particular  the  most 
marked  differences  exist  between  various  groups  of 
laborers.  The  inherited  strength  or  vigor  of  the  work- 
man is  one  important  cause  of  his  efficiency  or  ineffi- 
ciency. Men  of  one  race  may  exceed  by  one  hundred 
per  cent  men  of  another  race  in  mere  muscular  strength 
or  in  capacity  to  endure  toil.  Acquired  knowledge,  skill, 
and  dexterity  are  second  causes  of  efficiency.  Many 
workers  show  an  utter  inability  to  learn  to  do  any- 
thing in  a  really  thorough  manner.  Good  food  and  com- 
fortable shelter  arc  third  requisites  of  effective   labor. 


124  PRINCIPLES   OF  ECONOMICS. 

Underfed  laborers  lack  vigor  and  energy,  while  un- 
healthy lodgings  enfeeble  the  workman  and  cause 
disease.  The  mental  and  moral  qualifications  of  the 
laborer  form  fourth  factors  of  efficiency.  Intelligent 
and  conscientious  workmen  require  less  superintend- 
ence, can  be  intrusted  with  work  for  which  any  others 
are  unsuited,  and  prove  most  effective  and  least  waste- 
ful. Finally,  the  social  esteem  in  which  labor  is  held 
and  the  social  position  accorded  to  the  laborer  are  fac- 
tors of  the  utmost  importance.  Where  labor  is  con- 
sidered honorable  service,  and  where  all  opportunities, 
political,  economic,  and  social,  are  open  to  the  man  who 
renders  most  effective  service,  laborers  will  display  en- 
ergy and  ambition  which  will  vastly  increase  the  value 
of  their  work.  The  contrast  between  the  United  States 
and  many  other  countries  is  most  marked  in  this 
particular. 

§  78.    The  number  of  laborers  in  any  country  will  de- 
pend upon  the  growth  of  population,  and  the  question  of 
The  supply  of  population  deserves  attention  at  this  point, 
labor.  The  natural  growth   of  population  depends 

upon  the  proportion  which  births  bear  to  deaths.  In  a 
community  of  10,000  persons,  300  births  or  deaths  per 
year  will  give  a  birth  or  death  rate  of  30  per  thousand. 
If  both  the  birth  rate  and  death  rate  are  30,  then  popu- 
lation will  remain  stationary.  If  the  birth  rate  should 
increase  to  35  and  the  death  rate  fall  to  25,  the  annual 
increase  of  population  would  be  10  per  thousand,  or  one 
per  cent.  In  1892  the  birth  rates  of  different  European 
countries  varied  from  40.3  in  the  case  of  Hungary,  to 


FACTORS   OF  PRODUCTION. 


125 


22.1  in  the  case  of  France  ;  while  death  rates  varied 
from  35  in  the  case  of  Hungary,  to  17.8  in  the  case  of 
Norway.  Thus  Hungary's  large  birth  rate  was  offset  by 
her  large  death  rate,  so  that  the  net  increase  of  popula- 
tion was  only  5.3  persons  for  each  thousand  inhabitants. 
On  the  other  hand,  Scotland,  Norway,  and  Germany,  the 
countries  showing  the  largest  net  increase  of  population 
in  that  year,  had  smaller  birth  rates  but  much  smaller 
death  rates,  as  follows  :  — 


Country. 

Birth  Rate. 

Death  Rate. 

Net  Increase. 

Scotland 
Norway 
Germany 

30.8 
29.6 
35.7 

18.5 

17.8 
24.1 

12.3 
11.8 
11.6 

At  the  present  moment  the  population  of  civilized  coun- 
tries is  generally  increasing.  Within  one  hundred  years 
the  population  of  Europe  has  increased  from  175,000,000 
to  more  than  357,000,000.  At  the  same  time  the  birth 
rate  shows  a  constant  decrease.  This  has  been  more 
than  balanced,  however,  by  a  large  decrease  of  the  death 
rate,  so  that  the  net  result  has  been  a  gain  in  popula- 
tion. In  the  United  States  vacant  lands  have  afforded 
abundant  room  for  millions  of  immigrants,  so  that  the 
growth  of  numbers  has  been  remarkably  rapid. 

Manifestly   the   increase  of  population  is  limited  by 
the  ability  of  mankind  to  procure  from  the 

1  Limits  upon 

earth  necessary  subsistence.     During  the  last  growth  of 

century  the  productivity  of  industry  has  so 

increased  that  the  lands  of  civilized  countries  are  able 


126  PRINCIPLES  OF  ECONOMICS. 

to  support  largely  increased  populations  in  far  greater 
comfort  than  smaller  numbers  formerly  enjoyed.  Wealth 
has  increased  much  faster  than  population.  On  the 
other  hand,  it  may  be  said  that  the  present  rate  of 
increase  of  numbers  cannot  be  maintained  forever.  If 
the  population  of  the  world  should  continue  to  double 
every  one  hundred  years,  as  that  of  Europe  has  actually 
done  during  the  past  century,  there  would  be  ultimately 
more  people  in  the  world  than  could  find  mere  standing- 
room,  to  say  nothing  of  subsistence.  Population  does 
not,  however,  increase  indefinitely  in  any  such  geo- 
metrical ratio.  In  uncivilized  countries  famine  and  pes- 
tilence, if  no  other  cause,  keep  down  numbers  to  the 
limits  imposed  by  the  available  supply  of  food.  The 
majority  of  civilized  men  prudently  restrict  the  growth 
of  population ;  so  that  it  may  happen,  as  has  been  the 
case  during  the  last  hundred  years,  that  wealth  of  all 
kinds  increases  faster  than  numbers. 

A  word  should  be  said  concerning  the  influences  which 
cause  the  population  of  civilized  countries  to  adjust  itself 
The  standard  *°  the  ability  of  the  people  to  increase  the 
of  living.  production  of  wealth.  Each  class  of  people 
in  any  society  is  accustomed  to  enjoy  a  greater  or  less 
amount  of  the  comforts  or  luxuries  of  life.  The  amount 
of  comforts  or  luxuries  customarily  enjoyed  by  any  class 
of  men  forms  the  "  standard  of  living  "  of  that  class. 
Prudent  people  will  not  marry  and  assume  the  bur- 
den of  the  support  of  a  family  until  they  possess  in- 
comes fhnt  will  enable  them  to  maintain  themselves  in 
the  same  degree  of  comfort  that  they  have  been  accus- 


FACTORS  OF  PRODUCTION.  127 

tomed  to  enjoy.  In  proportion  as  people  are  prudent 
enough  to  insist  on  maintaining  their  customary  stand- 
ard of  living,  or  even  to  desire  to  raise  their  standard, 
the  number  of  marriages,  and  hence  the  numbers  of 
the  population,  will  be  adjusted  to  the  limits  imposed  by 
the  amount  of  wealth  possessed  by  such  persons. 

The  standard  of  living  is  not  fixed,  but  may  be  either 
raised  or  lowered.     Educational  influences  which  arouse 
new  and  higher  wants  tend  to  lead  people  The  standard 
to  demand  an  increased  share  of  comforts  or  5*^7*!; may 

be  raised  or 

luxuries,  and  tend  to  deter  men  from  assum-  lowered, 
ing  the  burdens  of  a  family  until  assured  of  the  means 
of  maintaining  the  higher  standard  of  living.  On  the 
other  hand,  there  are  considerable  numbers  of  people  in 
any  community  who  raise  families  which  they  have  no 
prospect  of  being  able  to  support  in  a  manner  which 
will  be  considered  comfortable  or  decent,  even  by  mem- 
bers of  the  social  class  to  which  they  belong.  Such 
people  constitute  a  large  part  of  our  pauper  classes,  and 
have  no  one  but  themselves  to  blame  for  the  suffering 
caused  by  their  own  reckless  conduct.  In  other  cases, 
through  misfortune  or  a  commercial  crisis  a  family 
which  was  once  accustomed  to  a  high  standard  of  living 
may  be  unable  to  maintain  such  a  standard,  and  may 
suffer  want  through  no  fault  of  its  own.  When  this 
happens,  the  great  danger  is  that  the  family  may  become 
accustomed  to  the  lower  plane  of  living,  may  lose  ambi- 
tion to  improve  its  position,  and  may  remain  perrna* 
nently  on  a  lower  level  of  economic  life.1 

1  See  Walker,  The  Wages  Question,  81-88. 


128  PRINCIPLES   OF  ECONOMICS. 

Many  interesting  facts  illustrate  the  manner  in  which 

the  growth  of  population  is  adjusted  to  the  ease  with 

which  the  available  wealth  of  the  community 

Illustrations. 

will  permit  a  family  to  be  supported.     Early 

in  this  century  wages  in  England  were  low,  and  the 
laboring  classes  generally  expended  more  than  one  half 
of  their  incomes  for  bread.  Under  such  circumstances 
statistics  showed  that  the  number  of  marriages  increased 
when  wheat  was  cheaper,  and  decreased  when  it  became 
dearer.  Later  on,  wages  increased  very  greatly,  so  that 
the  laborers  spent  a  smaller  proportion  of  their  incomes 
for  bread,  and  more  for  other  things.  Then  it  was 
noticed  that  the  marriage  rate  no  longer  fluctuated  as 
the  price  of  bread  changed,  but  that  it  varied  according 
to  the  general  commercial  prosperity  of  the  country. 
Another  illustration  may  be  taken  from  English  experi- 
ence. Early  in  the  present  century,  the  Poor  Laws  of 
England  were  so  unwisely  administered  as  to  make  it 
far  too  easy  for  families  to  secure  poor-relief.  This 
made  it  unnecessary  for  laborers  to  exercise  even  the 
former  degree  of  prudence  in  contracting  marriages, 
and  the  result  was  a  very  rapid  growth  of  numbers. 
Moreover,  as  the  laziest  and  least  enterprising  people 
took  most  advantage  of  the  poor-relief,  this  increase  of 
numbers  occurred  in  the  least  desirable  elements  of  the 
English  population.  A  great  deal  of  other  experience 
confirms  the  conclusion  that  it  is  always  dangerous  to 
relieve  poverty  in  any  manner  which  destroys  each  man's 
responsibility  for  the  support  of  his  family.  Unwisely 
managed  charity  merely  allows  the  families  of  the  shift- 


FACTORS   OF  PRODUCTION.  129 

less  and  worthless  to  increase ;  and  this,  too,  at  the 
expense  of  the  industrious  and  enterprising  people  who 
are  taxed  for  the  support  of  charitable  institutions. 
Those  who  have  had  most  experience  in  managing 
bonevolent  enterprises  are  the  most  strenuous  in  de- 
nouncing unwise  and  indiscriminate  poor-relief  as  a 
crime  against  society. 

Economic  progress  is  generally  marked  by  an  increase 
of  wealth.  Whenever  such  an  increase  occurs,  a  question 
of  the  utmost  economic  importance  arises  :  Economic 
What  will  be  done  with  the  increased  JeSdSd 
wealth?  It  may  be  used  to  support  a  of  living, 
larger  population  at  the  same  standard  of  comfort 
which  previously  existed ;  it  may  be  used  to  support  the 
same  population  in  greater  comfort ;  or,  finally,  it  may 
be  used  partly  to  increase  the  standard  of  living  and 
partly  to  increase  numbers.  In  the  present  century  the 
growth  of  wealth  has  served  to  double  the  population  of 
civilized  countries,  and  to  more  than  double,  perhaps, 
the  comfort  in  which  people  live.  If  all  increase  of 
wealth  is  used  for  supporting  a  largely  increased  popu- 
lation, little  or  nothing  is  gained  so  far  as  the  general 
welfare  of  each  individual  is  concerned.  Whenever 
wealth  increases,  and  incomes  increase,  it  is  of  the 
utmost  importance  that  a  wise  use  should  be  made  of 
the  new  wealth.  If  it  is  used  to  raise  the  standard  of 
comfort,  there  will  be  a  permanent  gain  in  economic 
prosperity.  If,  on  the  other  hand,  it  serves  merely  to 
increase  numbers,  society  will  remain  at  the  same  eco- 
nomic level  which  it  formerly  occupied. 

9 


130  PRINCIPLES  OF  ECONOMICS. 

In  the  United  States,  highly  unusual  circumstances 

have  tended  to  obscure  the  fact  that  population  has  to 

circumstances  be  ad3usted  to  the  incomes  of  any  people, 

of  the  united    and  that  there  are  ultimate   limits  beyond 

States  are  . 

Mghiy  ex-  which  at  any  given  time  an  increase  01  popu- 
ceptionai.  lation  is  undesirable.  Our  numbers  have 
been  confined  to  the  limits  set  by  income,  but  the  ease 
of  earning  a  large  income  has  been  so  great  that  popu- 
lation has  seemed  capable  of  increasing  without  limit. 
We  have  had  a  smaller  population  than  was  absolutely 
needed  in  order  to  subdue  our  vast  unoccupied  terri- 
tory, and  to  develop  our  natural  resources  to  the  best 
advantage.  Although  the  most  desirable  portions  of 
our  arable  lands  are  now  occupied,  we  yet  have 
room  for  many  millions  of  additional  inhabitants.  So 
long  as  every  newcomer  could  be  given  a  farm,  each 
increase  of  numbers  might  mean  simply  one  more 
laborer  engaged  in  agriculture ;  and  no  increase  of 
population  could  result  in  a  lower  standard  of  living. 
But  such  a  condition  of  things  cannot  last  forever,  and 
population  cannot  continue  to  increase  as  rapidly  as  it 
has  in  the  past.  In  fact,  the  rate  of  increase  has  per- 
ceptibly declined  in  recent  years.  From  1870  to  1880 
the  percentage  of  increase  was  30.08,  a  smaller  percent- 
age than  was  ever  before  known  except  during  the 
decade  which  included' the  Civil  War.  But  from  1880 
to  1890  the  percentage  of  "increase  fell  still  further  to 
24.86  per  cent.  In  the  older  sections  of  the  United 
States,  where  population  is  more  dense,  there  has  been  a 
marked  decrease  in  the  birth  rate.     As  fast  as  the  other 


FACTORS  OF  PRODUCTION.  131 

portions  of  the  country  become  more  thickly  settled,  the 
same  thing  will  be  noticed  there.  Our  population  will 
continue  to  grow  for  a  long  time  to  come,  and  our  stand- 
ard of  living  may  continue  to  rise.  But  the  rate  of 
increase  will  grow  smaller,  because  the  elevation  of  the 
standard  of  living  will  require  prudence  in  adjusting  the 
number  and  size  of  families  to  available  income. 

§  79.    Man  and  nature  are  the  original  factors  of  pro- 
duction.     But  in  all  labor  except  the  most   primitive 

forms,  a  third  factor,  capital,  is  needed.    The 

'  Capital  as  a 

hands  of  man  unaided  would  hardly  be  able  to  factor  of 

do  more  than  to  gather  wild  fruits  and  nuts,  pro  uc 

and  to  secure  a  few  of  the  gifts  which  nature  yields  to 

the  labor  of  mere  appropriation.     Most  economic  goods 

cannot   be  secured  by  the  direct  application  of  man's 

efforts   to   his  physical   surroundings.     It  is  necessary 

for  man  to  apply  his  labor  in  an  indirect  manner.     If 

he  will  first  fashion  for  himself  fish  nets  and  hunting 

weapons,  he  may  then  secure   fish  and   game   that  he 

otherwise  would  be  unable  to  procure.    If  he  will  first 

devote  some  labor  to  the  manufacture  of   shovels  and 

plows,  he   may  place   seeds  in  the   ground  in   such  a 

manner  that  natural  forces  will  cause  them  to  yield  an 

abundant  harvest.      If  ho  will  first  construct  a  water 

wheel  or  invent   a  steam  engine,  he  may  harness  the 

motive  forces  of  water  and  steam,  and  may  apply  them 

to  the  production  of  results  which  no  amount  of  unaided 

human  effort  could  possibly  achieve.     It  is  evident   that 

in  all    such    cases   men    adopt   an    indirect   method    of 

satisfying  their  wants.     They    first  produce  tools   and 


132  PRINCIPLES   OF  ECONOMICS. 

machinery,  and  then  utilize  these  instruments  in  their 
efforts  to  secure  desired  want-satisfiers.  In  this  wa}' 
men  first  labor  to  secure  various  instruments  of  produc- 
tion, and  then  by  means  of  such  appliances,  are  enabled 
to  satisfy  their  wants  more  fully  than  would  otherwise 
be  possible. 

Indirect  methods  of  production  are  far  more  efficient 

than  direct  methods,  because  indirect  production  may 

indirect  or      enable  man  to  utilize  all  the  available  ma- 

™^d^b0,it     terials  and  forces  of  nature.     Such  materials 

methods  of 

production.  as  the  useful  metals  could  never  be  brought 
into  a  form  adapted  to  any  human  use  without  the  aid 
of  instruments  and  appliances  of  indirect  production. 
Even  such  a  material  as  wood  could  never  be  reduced 
to  a  condition  of  greatest  usefulness  without  indirect 
methods.  Many  of  the  forces  of  nature  cannot  aid  very 
greatly  the  processes  of  direct  production.  Pleat  and 
moisture  cannot  act  most  efficiently  upon  the  seeds  un- 
less the  soil  has  been  properly  prepared  by  the  use  of 
suitable  instruments.  Air,  water,  steam,  and  electricity 
are  powerless  to  assist  in  the  labor  of  production  unless 
men  construct  suitable  appliances  to  bring  these  forces 
into  operation  in  the  right  manner.  By  an  indirect  proc- 
ess, therefore,  man  can  secure  the  fullest  cooperation 
of  nature,  and  can  vastly  increase  the  production  of 
wealth. 

Capital,  then,  consists  of  all  the  intermediate  products 
Definition  of  which  man  creates  for  the  purpose  of  using 
capital.  them  in  the  production  of  finished  consump- 

tion-goods.    It  is  produced  for  the  reason  that  its  use 


FACTORS   OF  PRODUCTION.  133 

serves  to  economize  human  labor,  and  to  utilize  fully 
natural  materials  and  forces.  The  wealth  which  men 
produce  may,  therefore,  be  divided  into  consumers'  goods, 
ready  for  final  consumption,  and  producers'  goods,  or 
intermediate  products  designed  to  be  used  in  the  produc- 
tion of  future  wealth.  In  this  chapter  we  have  to  con- 
sider capital  as  a  factor  of  production  merely.  Our 
definition,  therefore,  must  be  a  definition  of  productive 
or  social  capital,  and  must  explain  the  part  which  capi- 
tal plays  in  the  process  of  indirect  production. 

§  80.  The  concrete  forms  which  productive  capital 
may  assume  are  as  follows  :  — ■ 

1.  Productive  improvements  upon   land,  such  as  fences, 

drains,  fertilizers,  etc.     The  land  in  itself  is  a  gift  of  nature, 

not  a  product  of  human  industry.     It  is  not 

1  f  Forms  of 

created  by  man  to  serve  as  an  aid  to  indirect      productive 
production.     Productive  improvements  may  be      caPltal- 
counted  as  capital  so  long  as  they  can  be  distinguished  from 
the  land  itself.     Fertilizers  or  drains  become,  in  a  shorter 
or  longer  time,  indistinguishably  merged  with  the  land. 

2.  Buildings,  such  as  factories  or  workshops,  devoted  to 
the  purpose  of  aiding  in  the  process  of  indirect  production. 

3.  Means  of  transportation,  such  as  roads,  canals,  and 
railways. 

4.  Raw  materials,  such  as  iron,  wood,  cotton,  silk,  and 
wool,  which  are  consumed  in  the  act  of  production,  but 
re-appear  in  the  product. 

5.  Auxiliary  materials,  such  as  coal,  lubricating  oils, 
and  bleaching  materials,  which  aid  the  productive  process, 
but  do  not  re-appear  in  the  product. 

6.  Tools  and  machines.  Within  the  last  centui'}7  these 
have  become  the  most  important  form  of  capital,  in  many 
respects. 


134  PRINCIPLES  OF  ECONOMICS. 

7.  Domesticated  animals  used  in  production.  Breeds  of 
domestic  animals  have  been  so  improved  by  scientific  breed- 
ing that  they  are  distinctly  a  product  of  human  industry. 

8.  Money,  weights  and  measures,  and  scales  and  balances. 
We  shall  soon  see  that  these  objects  are  a  most  important 
means  of  carrying  on  capitalistic  or  roundabout  production. 

9.  Commercial  stocks  of  finished  products  or  consumers' 
goods.  These  do  not  include  consumers'  goods  in  the  hands 
of  the  final  consumers.  Strictly  speaking,  finished  products 
should  not  be  called  consumers'  goods  until  they  reach  the 
final  consumers.  Capitalistic  production  would  be  impos- 
sible if  capitalist-producers  did  not  produce  goods  for  dis- 
tant markets  and  for  a  future  Season's  consumption. 
Wheat  must  be  produced  in  one  season,  and  a  sufficient 
stock  must  be  carried  over  to  last  until  the  next  harvest. 
Spring  dress  goods  must  be  produced  several  months  in 
advance  of  the  season  when  they  are  demanded.  Agricul- 
tural implements,  made  in  America  and  exported  to  Australia, 
may  be  several  months  in  reaching  the  final  consumer. 
Merchants  perform  the  important  social  function  of  carry- 
ing all  such  commercial  stocks  of  goods  as  require  weeks 
or  months  to  pass  from  producer  to  consumer.  Com- 
mercial or  mercantile  stocks  of  finished  products  are  an 
indispensable  aid  to  the  process  of  capitalistic  production, 
and  fall  under  our  definition  of  capital.  They  are  really 
producers'  and  not  consumers'  goods.  They  are  materials 
to  which  time  and  place  utilities  are  being  added  by  the 
merchants  who  forward  them  to  consumers. 

10.  Capital  used  by  persons  who  render  personal  services. 
The  instruments  of  the  surgeon,  and  the  books  and  scientific 
apparatus  of  the  student  are  examples.  A  fuller  classifica- 
tion would  include  at  least  the  following  objects  under  this 
form  of  capital:  (a)  all  scientific  and  professional  instru- 
ments and  apparatus;  (&)  churches,  theaters,  public  halls, 
and  all  buildings  necessary  for  rendering  personal  services; 


FACTORS  OF  PRODUCTION.  135 

(c)  court  houses,  jails,  forts,  warships,  government  build- 
ings, and  all  the  appliances  necessary  for  public  functions. 
All  these  are  means  of  producing  indirectly  services  which 
could  not  be  rendered  directly  without  such  appliances. 

§  81.  Something  more  should  be  said  concerning  two 
things  which  have  been  excluded  from  the  above  list 
of  the  concrete  forms  of  capital.     Land  was  T    .    M 

r  Land  and  ac- 

cxcluded   because  it  is   primarily  a  gift   of  quired  facui- 

,.  .  ties  are  not 

nature,  and  not  a  product  of  human  Indus-  productive 
try  devoted   to  the  purpose  of   capitalistic  capital- 
production.     Yet  it  should  not  be  forgotten  that  inde- 
pendent  productive    improvements   are  capital.     More- 
over, such  improvements  are  so  common  that  land  often 
ceases  to  be  a  mere  gift  of  nature.      Much  land  owes 
part  of  its  usefulness  to  labor  expended  upon  it.    Never- 
theless, certain  properties  of  land  are  always  exclusive 
gifts  of  nature,  and  not  the  result  of  human  labor  ex- 
pended  directly    in   their   production.     Some  soils  are 
naturally  more  fertile  or  more  lasting  than  others.     A 
north  slope  is  less  fertile  than  a  south  slope.     The  loca- 
tion of  a  farm  with  respect  to  the  market,  or  of  a  city 
lot  with   respect  to  the  center  of  business  activity,  ip 
wholly  independent  of  labor  devoted  directly  to  that  pur- 
pose.    Some  economists  have  included  knowledge  and 
acquired  faculties  among   the   forms  of  capital.      But 
this  is  unnecessary,  since  all  such  things  are  included 
in  the  efficiency  of  labor,  another  factor  of  production. 
More  than  this,  such  faculties  are  a  part  of  man  him- 
self, not  a  part  of  his  possessions.     He  may  sell  the 
use  of  his  faculties,  but  cannot  part  with  them.     For 


136  PRINCIPLES   OF  ECONOMICS. 

these  reasons  knowledge  and  acquired  faculties  are  not 
to  be  considered  capital. 

§  82.  Many  writers  have  held  that  food  and  clothing, 
the  subsistence  of  laborers,  are  to  be  considered  capital, 

capital  and      since   they    enable   the  workers  to  produce 

subsistence.  more  wealth.  But  we  have  already  seen 
that  food  and  clothing  in  the  hands  of  the  laborers  are 
consumption-goods,  and  that  when  a  consumption-good 
reaches  the  consumer  it  is  finally  destroyed.  Further 
than  this  the  analysis  of  the  economist  need  not  go. 
Food  and  clothing  that  are  in  the  hands  of  nmnufactur- 
ers  and  merchants,  however,  form  part  of  the  mercan- 
tile stock  of  the  community,  and  are  to  be  regarded 
as  capital.  Such  commodities,  although  they  may  be 
finished  products,  are  more  properly  to  be  considered 
producers'  goods,  to  which  time  and  place  utilities  are 
being  added  by  the  process  of  forwarding  the  goods  to 
consumers. 

We  have  already  seen  that  production  requires  time. 

In  the  simplest  forms  of  production,  when  man  merely 

Mercantile       appropriates   a   natural    product,    such    as 

capUatistic        wild  fruits>  fish>  or  game>   only  a  VC1T  short 

production,  interval  may  elapse  between  the  exertion 
of  human  labor  and  the  attainment  of  the  desired  ob- 
ject. On  the  other  hand,  the  production  of  an  agricul- 
tural product  may  require  several  weeks,  while  the 
construction  of  a  canal  may  require  many  years.  In 
all  cases  where  indirect  production  is  carried  on,  a  cer- 
tain  time  must  elapse  before  the  formation  of  capital 
will  be  rewarded  by  the  increased  product  of  consumers' 


FACTORS  OF  PRODUCTION.  137 

goods.  During  the  process  of  production  the  laborers 
must  have  food,  shelter,  and  clothing.  They  are  pro- 
vided with  these  things  out  of  the  stocks  of  products 
which  merchants  are  constantly  forwarding  from  pro- 
ducers to  consumers.  Laborers  themselves  seldom  keep 
on  hand  any  large  amount  of  subsistence-goods.  They 
expect  to  receive,  from  time  to  time,  wages  which  may 
be  expended  in  purchasing  food  and  clothing  out  of  the 
mercantile  stocks  of  completed  products  which  exist  in 
all  civilized  communities.  In  modern  society  middle- 
men, or  merchants,  perform  the  important  functions  of 
accumulating  subsistence-goods  and  all  other  com- 
modities at  the  seasons  when  they  are  produced,  and 
then  of  distributing  them  to  consumers  as  fast  as 
demanded. 

§  83.  We  may  distinguish  between  fixed  and  circu- 
lating capital.     Fixed  capital  consists  of  objects  which 
serve  to  assist  several  acts  of  production. 
Circulating  capital  is  consumed  in  a  single  cations  of  the 
act  of  production.     All  raw  materials   are  ducUvfcapi- 
oirculating   capital ;    tools,  machinery,  and  taX- 
buildings  are  fixed  capital.     Since  the  wonderful  inven- 
tions which  caused  the  Industrial  Revolution,  the  use  of 
machinery  in  all  branches  of  production  has  increased 
at  a  constantly  accelerating  speed.     This  has  caused  the 
proportion  of  fixed  capital  used  in  modern  production 
to  increase  at  a  rapid  pace.     Another  important  dis- 
tinction is  between   free  and  specialized  capital.     Free 
capital  exists  in  such  a  form  that  it  may  be  applied  to 
any  one  of  many   industries;  specialized  capital   is  in- 


138  PRINCIPLES   OF  ECONOMICS. 

vested  in  such  a  way  that  it  assumes  a  fixed  form,  and 
cannot  be  withdrawn  for  investment  elsewhere.  Coal, 
lumber,  iron,  and  steel  are  relatively  free  to  be  invested 
in  one  or  many  different  kinds  of  industry.  Railroads, 
canals,  blast  furnaces,  and  carpet  looms  are  examples 
of  specialized  capital  which  is  nearly  worthless  for  any 
purpose  except  one  single  form  of  production. 

§  84.    Many  reasons  make  it  desirable  for  us  to  have 

a  clear  conception  of  what  is  required  for  formation  of 

productive  capital.     The  first  thins;  that  is 

The  process       l  l  ° 

of  capital-  necessary  is  that  men  should  perceive  that 
the  indirect  or  capitalistic  method  of  produc- 
tion will  enable  them  either  to  produce  more  goods  than 
would  be  possible  by  direct  production,  or  to  produce 
goods  which  direct  methods  would  never  enable  them  to 
secure.  Obviously,  the  second  step  is  for  men  to  under- 
take the  labor  of  collecting  the  materials  and  fashioning 
the  tools  necessary  for  the  process  of  indirect  production. 
The  production  of  the  various  forms  of  capital  is,  there- 
fore, the  second  step  in  capital-formation.  But  this 
step  will  not  be  taken  unless  men  are  willing  to  work 
for  future  products,  available  only  after  capital  has  been 
created  and  has  been  used  to  produce  consumers'  goods. 
In  other  words,  it  is  necessary  to  labor  for  future  enjoy- 
ments instead  of  present,  to  prefer  a  greater  quantity  or 
variety  of  future  goods  to  a  smaller  number  of  pres- 
ent satisfactions.  Capital-formation  requires,  therefore, 
abstinence  from  present  satisfactions  and  the  willingness 
to  labor  for  products  that  will  be  available  only  in  the 
future.     Economists  hove  expressed  this  idea  by  saying 


FACTORS   OF  PRODUCTION.  139 

that  capital  is  the  result  of  abstinence,  as  well  as  of 
production. 

All  capital  is  the  result  of  production,  but  the  work 
of  capital  production  is  actually  performed  under  two 
di  (To rent  sets    of    circumstances.      First,   a  „_.  „    „ 

'         Methods  of 

farmer  or  a  mechanic  may  produce  capital  capitai- 

t,  .',.,.  i        i     -i  t  r  formation, 

tor  use  in  his   business    by   building  fences, 

digging  drains,  and  improving  fields,  or  by  constructing 
a  workshop  and  making  tools.  Second,  capital  may  be 
produced  by  laborers  who  are  hired  to  make  it  for  other 
people.  This  takes  place  when  a  person  saves  a  portion 
of  his  income,  and  invests  the  savings  in  a  productive 
enterprise.  Such  a  person  may  hire  laborers  to  make 
tools  and  machines,  or  to  build  and  equip  a  factory. 
He  may  buy  shares  of  a  business  corporation,  and  thus 
turn  his  savings  over  to  be  invested  by  its  managers. 
Again,  he  may  place  his  savings  in  a  bank,  and  allow 
them  to  be  invested  by  the  officials  of  that  institution. 
In  all  these  cases,  what  the  person  really  does  is  to  use 
his  savings  for  the  purpose  of  hiring  laborers  to  produce 
various  forms  of  productive  capital.  Savings  banks  have 
a  peculiar  importance,  since  they  accumulate  very  small 
deposits  from  many  depositors  and  secure  large  capi- 
tals for  investment  purposes.  In  the  year  1894  -  95 
the  savings  banks  of  the  United  States  held  deposits 
amounting  to  $1,810,597,0^3.  This  sum  belonged  to 
4,875,519  persons,  and  represented  an  average  deposit 
of  -1371.36  for  each  depositor. 

We  have  seen  that  the  production  of  capital  will  not 
take  place  unless  a  man  prefers  to  labor  for  future  goods 


140  PRINCIPLES   OF  ECONOMICS. 

rather  than  for  present.     Working  for  future  pleasures 

requires  abstinence  from  present  enjoyments.     This  is 

Abstinence      true  whether  a  person  produces  capital  him- 

and  the  jr    or  saves  ou£  0f  \x[s  inc0me  a  surplus 

inducement  '  * 

to  saving.  with  which  he  purchases  productive  capital. 
A  controversy  has  arisen  concerning  the  amount  of 
abstinence  that  is  involved  in  saving.  It  is  very  evident 
that  a  person  with  an  annual  income  of  $500  will  have 
to  sacrifice  the  enjoyment  of  many  present  pleasures  in 
order  to  save  $100  each  year.  On  the  other  hand,  it  has 
been  denied,  sometimes  with  great  ridicule,  that  the 
savings  of  the  rich  man  require  any  real  abstinence  to 
be  incurred  by  him.  Thus  Ferdinand  Lassalle,  the 
socialist,  wrote  :  "  The  ascetic  millionaires  of  Europe ! 
Like  Indian  penitents  or  pillar  saints  they  stand  on 
one  leg,  each  on  his  column,  with  straining  arms  and 
pendulous  body  and  pallid  looks,  holding  a  plate  toward 
the  people  to  collect  the  wages  of  their  Abstinence.  In 
their  midst,  towering  up  above  all  his  fellows,  as  head 
penitent  and  ascetic,  the  Baron  Rothschild  !  "  But,  as 
we  have  used  the  word,  abstinence  means  desisting  from 
some  present  pleasure  in  order  to  procure  some  future 
result.  It  does  not  imply  that  a  rich  man  has  to  live 
abstemiously  in  order  to  save  even  large  amounts  of 
money.  It  means  simply  that  when  a  millionaire  builds 
a  cotton  factory  instead  of  a  palace  or  a  yacht,  he 
sacrifices  present  to  future  enjoyments.  He  may  save 
$100,000  more  easily  than  a  poor  man  saves  $100,  but 
abstinence  from  present  goods  is  necessary  in  the  one 
case    as   in   the   other.     Since    saving   does,   therefore, 


FACTORS   OF  PRODUCTION.  141 

require  abstinence  or  the  sacrifice  of  present  pleasures, 

it  follows  that  the  amount  of  saving  which  people  will 

practice  will  vary  according  to  the  difficulties  of,  and  the 

inducements  to,  saving.    Security  of  invested  property  is 

the  first  and  most  important  inducement.      Whenever 

such  security  is   destroyed,  little  saving  is  carried  on. 

A  fair  rate  of  interest   on  invested  capital  is  another 

inducement.     Yet  it  cannot  be  shown  that  there  is  any 

minimum  rate  of  interest  that   will  absolutely  stop  all 

saving.     On  the  other  hand,  high  rates  of  interest  are 

sure  to  lead  to  an  increase  of  the  supply  of  productive 

capital.     A  third  inducement  to  saving  is  the  desire  to 

provide  for  the    comfort  and  integrity  of  one's  family. 

A  very  low  rate  of  interest  will  not  deter  a  father  from 

providing  for  the  future  support  of  his  family  in  case  of 

his  death.     We  conclude  that  saving  capital  does  involve 

a  certain  degree  of  abstinence,  and  that  the  amount  of 

saving  will  vary  directly  as  the  inducements  offered. 

Social,  or  productive,  capital  can  be  maintained  only 

by  constant  investments  of  new  capital.     Raw  materials 

are  continually  being  used  up  ;  tools  and  ma- 

.        .  Capital  is 

chines  wear  out  in  the  course  of  time  ;  fac-  maintained 
tories,  railroads,  and  canals  require  constant  JJJ^1^^^!4 
repairs.     Each  year  a  portion  of  the  savings  stant  ^vest- 
of  any  people  must  be  devoted  to  replacing 
capital   destroyed    during    the    last    productive   period. 
Thus  existing  capital  would  rapidly  diminish  if  saving 
should  cease  to  be  practiced.    Stocks  of  productive  capital 
can  be  increased  only  by  making  good  the  annual  loss,  and 
then  investing  additional  capital  in  new  enterprises. 


142  PRINCIPLES  OF  ECONOMICS. 


LITERATURE   ON  CHAPTER  V. 

General  References :  Andrews,  Institutes  of  Economics,  31- 
82;  Bohm-Bawerk,  Positive  Theory  of  Capital,  1-125;  Cannan, 
Elementary  Political  Economy,  3-25 ;  Ely,  Outline  of  Economics, 
89-117;  Gide,  Political  Economy,  96-16S;  Hears,  Plutology, 
24-229,  291-331,  382-423;  Laveleye,  Political  Economy,  30-130; 
Marshall,  Principles  of  Economics,  214-400 ;  Mill,  Principles  of 
Political  Economy,  Bk.  I.;  Newcomb,  Political  Economy,  70-144  ; 
Roscher,  I.  119-285;  Smith,  Wealth  of  Nations,  Bk.  I.,  Chaps.  1, 
2,  3,  Bk.  II.,  Chaps.  1,  2,  3 ;  Walker,  Political  Economy,  33-77. 


ORGANIZATION  OF   THE  FACTORS.  143 


CHAPTER  VI. 

THE  PRODUCTION   OF   WEALTH. 

{Continued.) 
I.    Organization  of  the  Factors  of  Production. 

§  85.  A  Robinson  Crusoe  may  apply  labor  and  capital 
to  land,  and  may  carry  on  a  purely  isolated  process  of 
production.  But  in  economic  society  the  prod^on  a 
production  of  wealth  is  a  social  process  ;  and  social  process, 
we  have  next  to  consider  the  social  organization  of  the 
three  productive  factors,  land,  labor,  and  capital.  We 
shall  find  that  production  requires  the  cooperation  of  the 
individuals  that  compose  any  economic  society ;  and  that 
it  is  a  cooperative,  therefore  a  social,  process. 

§  86.  The  simplest  form  of  cooperative  or  associated 
production  is  seen  in  the  association  of  a  number  of  per- 
sons to  produce  a  result  which  the  efforts  of  simple  asso. 
a  single  individual  could  accomplish  less  ciated effort, 
easily,  or  perhaps  could  not  accomplish  at  all.  When 
all  the  men  in  a  community  join  in  raising  the  frame  of 
a  house,  or  in  harvesting  a  field  of  corn,  we  have  an  in- 
stance of  simple  associated  production. 

§  87.   The  division  of  occupations  is  a  second  form  of 
cooperative  production.     This  occurs  with-  Division  of 
in  a  family  when  the  men  attend  to  outdoor  occupaUons' 
work,  and  the  women  to  indoor  work.    Or  it  takes  place 


144  PRINCIPLES   OF  ECONOMICS. 

within  a  community  when  certain  men  devote  themselves 
mainly  or  exclusively  to  the  trade  of  the  smith,  the  car- 
penter, or  the  shoemaker,  and  perform  all  such  work 
for  the  other  members  of  the  society. 

§  88.  A  third  and  more  complicated  form  of  associa- 
tion is  seen  in  what  is  technically  called  the  division  of 

Division       labor.     By  this  is  meant  the  division  of  the 

of  labor.  process  of  producing  a  commodity  into  a 
number  of  small  parts.  Each  laborer  is  intrusted  with 
the  performance  of  some  one  or  two  parts  of  the  process. 
in  this  way  the  manufacture  of  a  pair  of  shoes,  a  sewing 
machine,  a  watch,  or  a  needle,  may  be  divided  into  fifty 
or  one  hundred  separate  processes.  The  division  of 
labor  has  been  carried  so  far  in  the  modern  factory 
that  any  reader  is  able  to  find  for  himself  many  illus- 
trations of  this  minute  subdivision  of  the  work  of 
production. 

The  introduction  of  the  division  of  labor  has  had  many 
beneficial  effects,  which  have  been  discussed  by  all  econ- 
omists since  the  time  of  Adam  Smith.     It 

Advantages 

oftnedivi-     assigns   to   each    laborer   a   single    process 

sion  of  labor.        ,  .   ,     ,  mi  .  j.    j  rj_ 

which  he  is  called  upon  to  repeat  day  after 
day  until  he  acquires  great  skill  and  dexterity  in  his 
work.  It  saves  time  which  would  be  lost  if  the  work- 
man should  be  compelled  constantly  to  change  from  one 
process  to  another.  It  enables  almost  every  one  to  find 
some  work  which  he  is  able  to  do,  although  he  may  suffer 
from  some  physical  disability.  Finally,  it  reduces  pro- 
duction to  a  series  of  comparatively  simple  processes, 
which  can  be  easily  studied  and  often  improved.    In  this 


.ORGANIZATION   OF  THE   FACTORS.  145 

way  invention  has  been  greatly  stimulated,  most  inven- 
tions taking  the  form  of  greater  or  smaller  improvements 
upon  details  of  the  productive  process. 

Yet  certain  disadvantages  are  sometimes  found  to 
grow  out  of  the  division  of  labor.  The  workman  who  is 
confined  to  a  single  process  often  finds  his 

Disadvantages 

work  exceedingly  monotonous.  Unless  he  of  the  division 
cultivates  other  interests,  his  faculties  are 
likely  to  become  narrowed,  and  he  is  likely  to  be  less 
intelligent.  Again,  the  division  of  labor  confines  work- 
men to  a  few  routine  operations.  Then,  if  thrown  out 
of  the  accustomed  branch  of  employment,  they  often  find 
difficulty  in  learning  another  trade.  Finally,  the  employ- 
ment of  women  and  children  in  many  lines  of  industry 
has  been  made  possible  by  the  division  of  labor.  Women 
and  children  are  able  to  operate  many  kinds  of  machin- 
ery, and  have  often  displaced  men.  In  factory  towns  it 
has  happened  that  fathers  have  been  thrown  out  of  work, 
while  wives  and  children  have  taken  their  places  at  the 
mills.  The  division  of  labor  has  been  found  an  indis- 
pensable condition  for  the  progress  of  modern  industry. 
A  wise  policy  will  seek  to  diminish  all  the  disadvantages 
which  may  arise  from  it,  while  retaining  its  great  bene- 
fits. Opportunities  for  education  and  recreation  -will 
counteract  whatever  monotony  of  occupation  the  division 
of  labor  produces.  The  labor  of  women  and  children 
may  be  abolished  in  certain  cases  where  it  is  especially 
detrimental  to  the  health  of  the  workers  or  to  the  welfare 
of  the  family,  while  in  other  cases  it  may  be  permitted 
under  adequate  restrictions. 

10 


146  PRINCIPLES   OP  ECONOMICS. 

§  89.  The  exchange  of  products  underlies  the  last  two 
forms  of  associated  production.  The  division  of  occupa- 
Exchangeof  ti°ns  cannot  take  place  unless  the  smith,  the 
products.  farmer,  the  carpenter,  and  the  shoemaker 
devise  some  method  of  exchanging  the  products  of  their 
respective  labors.  The  division  of  labor  cannot  be  carried 
very  far  until  there  is  an  organized  system  of  markets. 
In  these  markets  merchants  bring  together  the  products 
of  all  branches  of  industry  in  such  a  way  as  to  enable 
the  men  who  produce  large  quantities  of  various  small 
commodities  to  find  a  market  for  their  wares.  Modern 
industry,  therefore,  is  based  upon  the  fact  that  each  man 
produces  large  quantities  of  salable  commodities  which, 
he  himself  could  never  consume,  and  then  depends  upon 
other  producers  to  furnish  him  with  supplies  of  consum- 
ers' goods  suited  to  his  wants.  This  interdependence  of 
all  producers  upon  the  markets  where  they  sell  their  prod- 
ucts or  purchase  their  supplies  has  been  carried  farthest 
in  those  industries  which  have  become  localized  in  a  few 
regions.  The  people  of  England  draw  food  and  raw 
materials  from  almost  all  quarters  of  the  earth,  and 
depend  upon  distant  markets  for  the  sale  of  their  manu- 
factured products.  In  the  United  States  the  manufacture  \ 
of  textiles  is  concentrated  in  New  England,  New  York, 
New  Jersey,  and  Pennsylvania ;  while  these  states  de- 
pend upon  the  South  or  the  West  for  their  raw  materials 
and  breadstuffs.  Thus  one  community  is  dependent 
upon  the  products  of  others,  and  a  territorial  division 
of  labor  is  carried  out.  Such  a  localizing  of  industries 
enables  each  region  to  devote  its  labor  to  those  branches 


ORGANIZATION  OF   THE  FACTORS.  147 

of  production  for  which  it  has  the  greatest  advantages. 
The  total  production  of  the  world  is  enormously 
increased  by  such  a  localization  of  production.  The 
exchange  of  products  is  a  part  of  the  process  of  pro- 
duction, but  it  requires  detailed  treatment  in  a  subsequent 
chapter. 

§  90.  A  fifth  form  of  associated  production  is  seen  in 
the  cooperation  of  the  factors  of  production.  The  per- 
sons who  control  the    supplies  of  land,  of 

1  *  Cooperation  of 

labor,  and  of  capital  must  cooperate  in  the  the  productive 
establishment  of  business  undertakings  or 
enterprises.  Sometimes  it  happens  that  one  man  may 
own  both  land  and  capital,  and  may  perform  all  the 
necessary  labor  of  production.  This  is  the  simplest  way 
to.  secure  the  cooperation  of  the  three  factors  of  produc- 
tion, and  is  very  common  in  the  United  States,  where  so 
many  farmers  cultivate  their  own  land  with  their  own 
capita]  and  labor.  On  the  plantations  of  the  South 
another  form  of  organization  formerly  existed.  The 
planters  owned  their  land  and  capital,  and  also  owned 
the  laborers.  In  both  of  these  cases  the  cooperation  of 
the  productive  factors  is  secured  by  simple  methods,  but 
the  organization  of  business  enterprises  is  often  much 
more  complex. 

Such  a  complex  form  of  business  organization  is  re- 
quired whenever  separate  classes  of  persons  control  the 
supplies  of  labor,  of  land,  and  of  capital  re- 
quired for  the  establishment  of  an  industrial  organization. 
.  .        .  ,  ,  The  employer, 

enterprise.     At  the  present  day  we  have  a 

large  class  of  persons  who  supply  labor  but  nothing  else. 


148  PRINCIPLES   OF  ECONOMICS. 

Another  class  supplies  capital,  while  land  may  be  sup- 
plied by  still  a  third  class,  the  landlords.  The  work  of 
securing  the  cooperation  of  laborers,  capitalists,  and  land- 
lords has  fallen  to  a  class  of  employers  or  undertakers 
of  business  enterprises.1  The  employer,  or  undertaker, 
has  become  a  person  of  the  greatest  economic  impor- 
tance. He  is  constantly  seeking  for  favorable  opportu- 
nities to  establish  business  enterprises,  he  assumes  the 
responsibility  of  investing  capital  and  hiring  land,  while 
he  employs  and  superintends  the  work  of  a  number  of 
laborers.  On  his  good  judgment  and  business  ability  the 
efficiency  of  the  productive  process  mainly  depends.  His 
function  is  altogether  distinct  from  that  of  the  capitalist, 
the  landlord,  or  the  laborer.  They  may  cooperate  in 
establishing  the  enterprise,  but  upon  the  employer  the 
responsibility  of  undertaking  and  conducting  the  busi- 
ness primarily  depends.  The  entrepreneur  may  own  the 
land  upon  which  the  enterprise  is  established,  he  may 
contribute  a  part  or  all  of  the  capital  used  in  production, 
he  may  even  labor  with  his  own  hands  ;  but  his  function 
as  entrepreneur  is  wholly  distinct  from  his  functions  as 
landlord,  capitalist,  or  laborer.  We  shall  next  study  the 
various  forms  of  business  undertakings,  or  the  various 
methods  in  which  entrepreneurs  exercise  their  functions 
in  establishing  and  managing  productive  enterprises. 

§  91.  Entrepreneurs  may  secure  the  cooperation  of 
land,  labor,  and  capital,  by  the  following  methods  :  — 

1  The  word  rt  undertaker  "  originally  meant  a  man  who  organized  and 
managed  a  business  on  his  own  responsibility.  In.  place  of  "  undertaker  " 
the  French  word  entrepreneur  has  been  commonly  used. 


ORGANIZATION  OF   THE  FACTORS.  149 

1.  The  single  entrepreneur  system.  In  this  a  single 
employer,  contributing  all  of  the  capital  or 

1      J       '  °  :  The  forms  of 

borrowing  a  part,  owning  or  hiring  the  hind  business  un- 
used, and  employing  a  sufficient  number  of 
laborers,  establishes    and   conducts   a  business   on  his 
individual  responsibility. 

2.  Next  conies  the  common  business  partnership. 
Two  or  more  men  divide  the  work  of  business  man- 
agement, and  jointly  assume  the  risks  incident  thereto. 
This  form  of  undertaking  is  advantageous  when  the 
business  requires  more  capital  than  any  partner  alone 
could  have  contributed,  or  when  the  cares  of  manage- 
ment need  to  be  divided.  The  partners  agree  to  divide 
profits  or  losses  in  certain  proportions,  and  are  jointly 
and  severally  liable  for  all  the  debts  of  the  firm  to  the 
extent  of  their  entire  fortunes. 

3.  A  third  form  of  undertaking  is  the  modern  busi- 
ness corporation.  The  older  corporations  were  formed 
generally  by  a  number  of  persons  who  were  empowered 
by  law  to  act  as  an  individual  for  certain  purposes,  and 
to  maintain  a  continued  existence,  beyond  the  life  of 
the  actual  associates,  by  providing  for  a  succession  of 
members.  A  church,  a  university,  or  a  charitable  insti- 
tution can  best  be  organized  in  this  way.  Such  a  corpo- 
ration is  in  the  eyes  of  the  law  an  artificial  person. 
Its  charter  of  incorporation  confers  upon  it  certain  spe- 
cific powers,  and  within  those  limitations  the  members 
of  the  corporation  act  as  one  person.  Thus  they  may 
acquire  or  sell  property,  may  sue  and  be  sued.  Beyond 
the  specific  powers  conferred  by  its  charter,  however,  no 


150  PRINCIPLES  OF  ECONOMICS. 

corporation  has  a  right  to  go.  Such  an  action  would  be 
declared  by  the  courts  to  be  ultra  vires,  that  is,  beyond 
the  powers  conferred  upon  the  corporation.  Moreover, 
the  charter  might  be  declared  to  be  forfeited  on  account 
of  such  a  violation.  The  modern  business  corporation  is 
regularly  a  joint-stock  company.  Its  capital  is  divided 
into  shares,  often  of  $100  each,  which  are  transferable 
at  the  option  of  each  shareholder.  Only  the  owners 
of  the  shares  of  the  capital  stock  are  members  of  the 
corporation.  Such  a  joint-stock  company  is  a  convenient 
form  of  business  undertaking  when  a  large  capital  is 
required.  Many  men  may  be  willing  to  invest  small 
amounts  of  money  in  an  enterprise  in  which  no  one  of 
them  would  wish  to  risk  his  entire  fortune.  Many  of 
the  earliest  joint-stock  companies  were  not  incorporated, 
and  were  merely  a  form  of  partnership.  Such  com- 
panies have  now  become  the  most  important  kind  of 
corporations.  They  may  be  formed  by  a  special  act  of 
legislation,  or  by  complying  with  a  general  law  author- 
izing groups  of  persons  to  form  themselves  into  cor- 
porations, organized  for  certain  purposes,  under  certain 
conditions.  Their  charters  are  either  perpetual  or  lim- 
ited to  a  term  of  years.  Where  corporations  are  given 
valuable  privileges,  it  is  very  important  that  the  charters 
should  end  after  terms  of  thirty  or  forty  years.  The 
modern  joint-stock  company,  therefore,  is  regularly  a 
corporation,  and  has  become  the  most  common  kind  of 
corporate  organization.  One  important  feature  of  such, 
business  associations  distinguishes  them  in  a  marked 
manner  from  other  forms  of  business  undertaking.    The 


ORGANIZATION  OF  THE  FACTORS.  151 

members  of  joint-stock  companies  were  originally  liable 
for  the  debts  of  the  companies  to  the  full  extent  of  their 
fortunes.     In  modern  times  their  liability  has  often  been 
limited  to  the  amount  of  money  that  they  invest  in  the 
stock  of  the  company.     Under  this  system  of   limited 
liability,  if  a  thousand  persons  contribute  $100  each  to 
form  a  capital  stock  for  a  business  corporation,  each  one 
is  liable  only  to  have  the  $100  contributed  by  him  seized 
for  the  debts  of  the  business.     The  stockholders  lose,  if 
the  business  is  unsuccessful,  all   the  money  invested ; 
but  they  do  not  risk  their  entire  fortunes  by  entering 
into  such  an  enterprise.     Sometimes   the   stockholders 
are  liable  for  double  the  amount  of  their  investment. 
Thus,  the  stockholders  of  one  of  our  national  banks  are 
liable,  in  case  of  the  failure  of  the  bank,  to  be  assessed 
for  a  sum  equal  to  the  par  value  of  the  shares  which 
they  hold.     Joint-stock  companies  with  limited  liability 
are  well  adapted  to  undertake  large  enterprises,  espe- 
cially when  there  is  considerable  chance  of  failure.     In- 
dividual employers  or  partners  would  seldom  take  the 
risks  which  their  unlimited  liability  would  compel  them 
to  assume  if  they  invested  their  capital  in  many  business 
enterprises.     Moreover,  as  the  capital  of  a  joint-stock 
company  becomes  larger  and  the  number  of  stockhold- 
ers increases,  any  single  stockholder  has  little  influence 
in   the   management   of    the   enterprise,   and   has   less 
knowledge  of  the  affairs  of  the  company.     It  is,  there- 
fore, unfair  to  hold  him  liable  for  the  debts  of  the  cor- 
poration to  the  full  extent  of  his  fortune.     Furthermore, 
the  capital  needed  for  many  large  enterprises  cannot  be 


152  PRINCIPLES  OF  ECONOMICS. 

obtained  unless  the  liability  of  the  investors  is  limited 
to  the  amount  of  their  investments.  During  the  last 
fifty  years  the  growth  of  business  corporations  has  been 
marvelous.  Enterprises  that  require  large  investments 
of  capital  almost  invariably  assume  corporate  form. 
Many  simple  business  partnerships  have  been  converted 
into  corporations,  partly  in  order  that  the  partners  may 
cease  to  be  liable  for  firm  debts  to  the  full  extent  of 
their  fortunes.  Great  abuses  have  undoubtedly  attended 
the  growth  of  corporations,  but  they  have  been  on  the 
whole  a  useful  and  necessary  form  of  economic  organi- 
zation. The  great  need  of  the  times  has  been  for  the 
large  capitals  required  to  build  railroads,  to  construct 
huge  steamships,  and  to  equip  giant  factories.  This 
need  the  joint-stock  companies  have  supplied.  More- 
over, they  have  possessed  the  further  merit  of  making  it 
possible  to  invest  small  sums  in  one  or  more  shares  of 
corporation  stock,  so  that  small  savings  have  been  accu- 
mulated in  a  manner  which  has  made  them  available 
for  the  largest  enterprises.  One  more  point  should  be 
noted.  Adam  Smith,  writing  in  1776,  argued  that  cor- 
porations could  never  be  managed  as  efficiently  as  busi- 
ness partnerships,  since  the  hired  managers  of  corporate 
enterprises  controlled,  not  their  own  money, but  the  cap- 
ital of  other  people.  For  this  reason  he  argued  that 
they  would  generally  be  wasteful  and  negligent.  In  this 
criticism  Smith  undoubtedly  put  his  finger  upon  a  real 
difficulty,  but  a  difficulty,  nevertheless,  which  has  been 
in  large  part  overcome.  Corporations  have  learned  to 
select  managers  from  tried   and  faithful  servants,. who 


ORGANIZATION  OF   THE  FACTORS.  153 

have  often  acquired  a  professional  pride  in  the  success 
of  the  business.  They  offer  large  salaries  as  rewards 
for  efficiency  ;  while  the  managers  may  own  stock  of 
the  company,  and  thus  have  a  direct  interest  in  the 
business.  Yet  many  corporations  incur  heavy  losses 
through  wasteful  management,  and  no  remedies  have 
been  found  for  many  of  these  cases. 

4.  A  fourth  form  of  undertaking  is  seen  in  what  is 
technically  called  cooperative  production.  Cooperation, 
in  this  limited,  technical  sense,  is  an  effort  to  dispense 
with  the  employer,  and  to  leave  the  management  of  a 
business  to  the  workmen.  Laborers  have  sometimes 
combined  to  supply  their  own  capital,  and  to  establish 
business  enterprises  on  their  own  responsibility.  Work- 
men acquire  in  this  way  the  same  interest  in  the  success 
of  the  undertaking  which  partners  have  in  the  success 
of  their  business.  This  often  leads  them  to  do  more 
and  better  work,  and  thus  increases  the  efficiency  of  the 
organization.  On  the  other  hand,  the  success  or  failure 
of  a  modern  business  depends  as  much  upon  able  man- 
agement as  upon  faithful  workmanship.  Cooperative 
enterprises  are  usually  managed  by  the  workmen  them- 
selves, or  by  committees  chosen  from  their  number. 
Such  a  divided  direction  has  so  far  proved  less  effi- 
cient than  the  business  partnership  or  the  corporation, 
in  which  the  management  can  more  easily  be  concen- 
trated in  the  hands  of  one  man  or  a  small  number 
of  men. 

5.  A  final  form  of  undertaking  is  the  management  of 
business  by  the  State.     The  United  States  Government 


154  PRINCIPLES  OF  ECONOMICS. 

manages  the  postal  business,  many  of  our  towns  own 
their  systems  of  water  works,  while  a  few  own  and  man- 
age gas  and  electric-lighting  works.  Government  en- 
terprise will  require  discussion  in  a  subsequent  chapter. 
§  92.  A  sixth  form  of  associated  activity  underlies  all 
the  forms  of  productive  enterprise  which  have  been  pre- 
viouslv  described,  and  marks  the  process  of 

Participation 

of  the  state  in  production   as    a   distinctly    social   process. 

pro  uc  on.  rpjie  importance  of  the  part  which  the  State 
takes  in  the  production  of  wealth  can  be  most  clearly 
shown  by  an  enumeration  of  some  of  the  cases  in  which 
governmental  activity  is  exercised. 

1.  The  State  endeavors  to  protect  its  citizens  against 
external  violence.  Unless  security  from  external  attack 
is  assured,  life  and  property  are  not  safe,  and  the  pro- 
ductive resources  of  a  nation  cannot  be  developed. 
England's  immunity  from  invading  armies  during  the 
great  Napoleonic  wars  enabled  her  to  outstrip  by  fifty 
years'  development  all  her  European  rivals. 

2.  The  State  aims  to  maintain  order,  and  to  protect 
persons  and  property  from  domestic  violence.  Between 
the  thirteenth  and  eighteenth  centuries,  the  King's  peace 
was  maintained  in  England  firmly  enough  to  enable  her 
wool-raising  industry  to  become  the  greatest  in  the 
world.  In  the  other  countries  of  Europe  lawlessness  was 
so  common  as  to  make  it  almost  impossible  for  such  an 
industry  to  be  carried  on. 

3.  The  State  makes  possible  and  regulates  the  hold- 
ing, exchange,  inheritance,  and  bequest  of  property. 
The  right  of  property  is  the  right  of  exclusive  disposal 


ORGANIZATION   OF   THE  FACTO  lis.  155 

over  a  thing,  within  certain  limits  fixed  by  the  laws  of 
the  State.  Many  people  are  inclined  to  regard  it  as  a 
"  natural  right,"  that  is,  an  absolute,  inalienable  right, 
not  to  be  questioned  for  any  reason  whatsoever.  As  a 
matter  of  fact,  the  right  of  property  can  be  shown  to  be 
an  historical  product,  gradually  developed  and  constantly 
modified  as  men  have  emerged  from  barbarism  to  a  con- 
dition of  civilized  life.  There  was  a  time  in  the  history 
of  all  European  peoples  when  practically  all  possessions 
belonged  to  the  clan  or  tribe,  not  to  the  individual. 
Private  property  was  developed  first  in  the  case  of  per- 
sonal belongings  and  the  products  of  man's  labor. 
Gradually,  and  within  times  of  which  we  have  historic 
record,  the  right  of  private  ownership  was  extended  to 
land.  The  exchange  of  property  between  individuals, 
and  the  rights  of  inheritance  and  bequest,  have  been 
narrowly  limited  by  law,  and  have  varied  widely  among 
different  peoples.  In  all  places  property  rights  have 
been  defined,  limited,  and  finally  protected  by  law  in 
such  a  manner  as  has  seemed  most  expedient.  Private 
property  has  been  so  long  established  among  us  that  it 
is  easy  to  commit  the  error  of  mistaking  it  for  something 
that  has  always  and  necessarily  existed,  and  in  its  pres- 
ent form.  While  it  has  proved,  on  the  whole,  a  highly 
desirable  and  useful  institution,  we  must  not  shut  our 
eyes  to  the  facts  that  it  has  always  been  limited  by  con- 
siderations of  social  expediency,  and  that  it  has  often 
been  modified.  A  few  instances  will  show  to  what  ex- 
tent a  man's  right  of  disposal  over  his  property  is  limited 
by  law.     First,  all  property  is  held  subject  to  the  right 


156  PRINCIPLES  OF  ECONOMICS. 

of  the  State  to  take  a  part  of  it  in  the  form  of  taxes. 
Second,  property  is  limited  by  the  State's  right  of  emi- 
nent domain,  under  which  the  State  may  take  property 
for  public  purposes,  compensating  the  owner  for  its  loss, 
however.  Third,  the  owner  of  property  may  not  use  it 
in  such  a  manner  that  it  becomes  a  public  nuisance,  or 
for  a  purpose  opposed  to  public  policy.  Finally,  prop- 
erty may  be  forfeited  to  the  State,  or  a  portion  of  it 
taken  in  the  form  of  fines.  In  many  ways  the  rights  of 
transfer,  of  bequest,  and  of  inheritance  of  property  are 
clearly  defined  and  limited  by  law.  We  are  now  ready 
to  consider  the  economic  importance  of  private  property 
for  the  production  of  wealth.  It  has  been  found  that 
men  will  not  engage  in  production  in  any  efficient  man- 
ner unless  they  are  secure  in  the  enjoyment  of  the  prod- 
ucts of  their  labor.  Through  the  establishment  and 
protection  of  property  rights,  the  State  furnishes  men 
with  the  greatest  incentive  to  diligent  effort.  Only 
through  cooperation  of  various  sorts  can  production  be 
made  at  all  large  and  copious.  The  division  of  labor, 
the  exchange  of  products,  and  the  voluntary  cooperation 
of  landowners,  capitalists,  and  laborers  in  forming  a 
business  undertaking,  all  presuppose  the  recognition 
and' protection  of  the  property  rights  of  individuals.  In 
defining  and  safe-guarding  property  rights,  the  State 
creates  the  indispensable  conditions  of  all  effective 
production. 

4.  The  State  determines  the  conditions  and  the  man- 
ner of  making  contracts,  and  then  enforces  the  faithful 
performance  of  such  agreements.    The  exchange  of  prod- 


TEE  ECONOMIC  STAGES.  157 

ucts  and  the  organization  of  business  enterprises  by 
landlords,  capitalists,  employers,  and  laborers  could 
hardly  be  carried  on,  and  could  never  have  reached 
their  present  state  of  development  without  a  strict  en- 
forcement of  contract  agreements  between  buyers  and 
sellers,  or  between  employers,  on  the  one  hand,  and 
laborers,  capitalists,  and  landowners,  on  the  other. 

5.  The  State  performs  many  services  indispensable 
for  the  production  of  wealth,  which  private  individuals 
never  would  perform  in  a  satisfactory  manner.  The 
coinage  of  money,  the  regulation  of  weights  and  meas- 
ures, and  the  construction  of  roads,  lighthouses,  har- 
bor improvements,  and  ocean  and  river  dikes  are  a  few 
examples  of  such  services. 

II.    Stages  in  the  Development  of  Production. 

§  93.  We  can  distinguish  five  stages  in  the  develop- 
ment of  the   process  of  wealth-production. 

1.  The  hunting  and  fishing  stage.  In  the  lowest 
grade  of  economic  development,  wealth  is  produced 
mainly  by  hunting  or  fishing,  by  labor  of  Thefiveeco_ 
mere  occupation.  Little  capital  is  used,  nomic  staees- 
and  it  consists  of  a  few  simple  tools  and  weapons. 
Famine  is  of  frequent  occurrence  whenever  supplies 
of  fish  and  game  become  scarce.  Population  is  sparse, 
since  much  land  is  required  to  furnish  fish  and  game 
sufficient  to  support  a  single  person.  Slavery  seldom 
or  never  exists,  since  slaves  could  be  made  useful  only 
by  putting  weapons  in  their  bands,  a  process  dangerous 
to  the  masters.     Fishing  tribes,  when  situated   on  the 


158  PRINCIPLES  OF  ECONOMICS. 

shores  of  navigable  waters,  may  develop  into  com« 
mercial  peoples.  The  American  Indians  were  mostly 
hunters  and  fishermen  at  the  time  of  European  colo- 
nization. In  pioneering  the  way  for  the  advance  of 
civilization,  the  European  settler  often  had  to  adopt  the 
same  method  of  securing  a  living. 

2.  The  pastoral  stage.  The  second  period  of  eco- 
nomic development  is  marked  by  the  fact  that  men  learn 
to  rear  and  domesticate  herds  of  animals,  and  to  depend 
chiefly  upon  their  herds  for  food  and  clothing.  The 
production  of  economic  goods  increases ;  and  some  per- 
sons acquire  considerable  wealth,  which  consists  mostly 
of  sheep  and  cattle.  Slavery  appears,  and  captured  ene- 
mies are  often  employed  in  the  peaceful  labor  of  pas- 
toral industry.  Pastoral  peoples  are  usually  nomadic, 
wandering  around  in  search  of  the  best  pastures.  In 
the  United  States  cattle  raising  has  long  been  a  typical 
frontier  industry,  which  gradually  makes  way  for  agri- 
culture and  manufactures. 

3.  The  agricultural  stage.  The  next  advance  is 
made  when  men  learn  to  raise  plants  as  well  as  animals. 
More  capital  is  used  in  production,  and  the  cooperation 
of  nature  is  secured  to  a  much  greater  extent.  When 
the  cultivation  and  improvement  of  the  soil  begins, 
people  settle  down  on  definite  tracts  of  land,  and  cease 
to  live  a  wandering  life.  Private  property  in  land  then 
originates.  The  production  of  wealth  increases,  so  that 
a  given  area  of  land  can  support  a  largely  increased 
population.  Slavery  often  assumes  large  proportions, 
since  men  prefer  to  impose  upon  slaves  the  hard  labors 


THE  ECONOMIC  STAGES.  159 

of  agriculture.  Subordinate  to  agriculture  and  cattle 
raising,  hunting  and  fishing  may  be  pursued.  In  agri- 
cultural communities  some  division  of  occupations  may 
be  found,  particularly  in  the  case  of  wood  and  metal 
workers. 

4.  The  manufacturing  and  commercial  stage.  At 
this  point  greater  attention  is  given  to  manufacturing 
into  highly  finished  products  the  raw  materials  secured 
by  the  hunting,  fishing,  pastoral,  agricultural,  and  min- 
ing industries.  This  work  requires  a  much  larger 
amount  of  capital,  and  leads  to  a  separation  of  trades. 
The  division  of  labor  may  also  be  introduced  ;  but 
manufactures  are  carried  on  mainly  by  hand,  aided 
only  by  the  motive  power  of  animals,  wind,  and  water. 
Commerce  now  becomes  an  industry  of  prime  impor- 
tance. When  men  live  by  agriculture  each  community 
is  self-sustaining,  and  requires  few  commodities  pro- 
duced in  other  places.  With  the  growth  of  hand  trades, 
communities  begin  to  show  different  capabilities  for 
producing  various  kinds  of  goods  ;  certain  industries 
become  localized  in  regions  that  have  the  greatest  ad- 
vantages for  producing  them;  and  an  exchange  of  prod- 
ducts  begins  on  a  wider  scale.  The  growth  of  commerce 
leads  to  the  extended  use  of  money  to  facilitate  ex- 
changes, which  had  previously  been  carried  on  by  barter. 
At  the  same  time  the  rise  of  manufactures  and  com- 
merce stimulates  the  growth  of  cities,  which  now  become 
manufacturing  and  commercial  centers.  In  antiquity 
the  most  flourishing  states  of  Greece  and  Italy  reached 
the  manufacturing  and  commercial  stage.     In  1750  the 


160  PRINCIPLES  OF  ECONOMICS. 

leading  countries  of  Europe  were  in  this  period  of  de- 
velopment, as  were  also  the  largest  and  most  populous 
of  the  English  colonies  in  America. 

5.  The  industrial  stage.  This  stage  was  reached  in 
the  time  of  the  Industrial  Revolution.  England  led  the 
way,  followed  by  the  United  States  and  various  Euro- 
pean countries.  It  is  characterized  by  the  vast  increase 
of  power  manufacture  ;  first  steam,  then  electricity  being- 
utilized.  Transportation  facilities  are  revolutionized  by 
the  use  of  steam,  and  international  commerce  rapidly 
increases.  Exchanges  are  effected  as  much  through 
the  means  of  credit  as  of  money.  The  employment  of 
power  in  manufactures  vastly  increases  the  use  of  capi- 
tal, while  business  is  conducted  on  a  much  larger  scale. 
Household  manufacturing  industries  are  replaced  by  fac- 
tories ;  small  factories  tend  constantly  to  be  replaced 
by  gigantic  enterprises  ;  and  the  business  corporation 
becomes  the  common  form  of  industrial  organization. 
As  we  are  now  living  in  the  industrial  stage,  the  remain- 
der of  this  book  will  be  devoted  mainly  to  an  explana- 
tion of  its  characteristics  and  tendencies. 

III.     Freedom  in  the  Establishment  of  Productive 
Undertakings. 

§  94.    In  modern  economic  society,  employers,  capi- 
talists, landlords,  and  laborers  are,  to  a  large   extent, 
Freedom  of     free  to  cooperate  in  establishing  productive 
JabofaT* °f  undertakings.     In  the  absence  of   legal  re- 
capitai.  straints,  labor  and  capital  are  freely  invested 

in  those   lines   of   business  which  promise   the  largest 


FREEDOM  OF  INDUSTRY.  161 

returns.  It"  any  profession  or  trade  is  not  adequately 
supplied,  remuneration  will  he  so  high  as  to  induce  a 
sufficient  number  of  new  enterprises  to  he  estahlished  to 
meet  the  demand.  On  the  other  hand,  when  any  line  of 
business  becomes  over-supplied,  capital  and  labor  will 
sooner  or  later  seek  investment  elsewhere.  In  this 
manner  the  productive  forces  of  society  are  distributed 
among  different  branches  of  production  in  proportions 
roughly  corresponding  to  the  needs  of  the  public.  In 
European  countries  such  freedom  of  investment  did  not 
exist  at  the  close  of  the  last  century.  In  France,  up  to 
the  Revolution  of  1789,  governmental  restrictions  and 
oppressive  regulations  made  by  exclusive  corporations 
rendered  it  almost  impossible  for  any  save  a  privileged 
few  to  carry  on  manufactures  or  commerce.  In  Eng- 
land, until  the  Industrial  Revolution,  the  investment  of 
labor  and  capital  was  restricted  by  guild  regulations 
and  by  laws  that  hindered  the  movement  of  laborers 
from  one  parish  to  another.  In  general,  it  can  be  said 
that  individual  enterprises  or  business  partnerships  were 
freed  from  restrictions  earlier  than  corporate  under- 
takings. Until  the  last  forty  or  fifty  years,  both  in 
England  and  the  United  States,  corporations  were  char- 
tered only  by  special  acts  of  legislation.  The  bestowal 
of  charters  became  an  act  of  legislative  favor  or  of 
political  privilege.  Members  of  one  political  party  often 
found  it  impossible  to  secure  a  corporation  charter  when 
the  other  party  was  in  power.  A  great  advance  was 
made  when  general  laws  were  passed  making  it  possi- 
ble  for   any  persons,   upon   complying  with   necessary 

11 


162  PRINCIPLES  OF  ECONOMICS. 

requirements,  to  associate  themselves  in  a  corporation. 
At  the  present  time  some  of  our  states  allow  charters  to 
be  granted  only  under  general  laws,  and  the  tendency  is 
everywhere  to  restrict  the  granting  of  special  charters. 
In  a  few  instances  the  establishment  of  productive  enter- 
prises is  still  limited  by  law.  The  United  States  pre- 
vents private  parties  from  engaging  in  the  postal 
business.  In  towns  and  cities  such  enterprises  as  gas. 
electric  lights,  and  water  works  are  carried  on  either  bv 
the  cities  or  by  private  corporations  which  have  received 
exclusive  franchises  and  privileges  from  the  municipal 
governments. 

IV.     Cost  of  Production. 

§  95.   It  will  be  useful  for  us  to  make  a  careful  analy- 
sis of  the  different  elements  that  may  enter  into   the 
.    .    .     cost  of  production  of  a  commodity.     Since 

Analysis  of  '  J 

cost  of  pro-  we  are  now  considering  production  as  a 
social  process,  we  must  analyze  the  cost  to 
society  of  producing  various  kinds  of  wealth.  This  can 
be  done  by  asking,  What  does  society  sacrifice  in  order 
that  the  productive  process  may  be  carried  on  ?  The 
different  elements  of  sacrifice  that  may  enter  into  the 
social  cost  of  production  are :  — 

1.  The  destruction  of  natural  agents.  Many  kinds 
of  production  may  be  carried  on  without  appreciably 
lessening  the  number  or  usefulness  of  the  natural 
agents  that  assist  the  process.  A  windmill  or  a  water 
wheel  may  be  used  in  such  a  manner.  But  in  many 
cases  some  gifts  of  nature  are  consumed  during  the  pro- 


COST  OF  PRODUCTION.  163 

ductive  process,  and  in  such  a  way  that  the  number  or 
usefulness  of  the  available  natural  agents  is  lessened. 
This  occurs,  for  instance,  whenever  coal  is  consumed  in 
generating  steam  or  electricity.  The  industries  of  Eng- 
land each  year  consume  a  very  appreciable  portion  of 
the  coal  supply  of  the  country.  In  agricultural  indus- 
try the  principal  natural  agent,  land,  may  be  improved 
by  careful  cultivation  ;  but  in  some  cases  the  fertility  of 
the  soil  is  decreased.  In  the  United  States  our  great 
staple  crops  of  tobacco,  cotton,  corn,  and  wheat  have 
taken  from  the  soil  a  far  larger  amount  of  the  vegetable 
and  chemical  elements  necessary  for  the  growth  of  plant 
life  than  has  been  restored  to  the  land  in  the  form  of 
fertilizers.  In  general  we  can  say  that  mining  indus- 
tries gradually  lessen  man's  available  supply  of  natural 
agents.  Agriculture,  fisheries,  and  forestry  may  be 
rationally  conducted  in  such  a  manner  that  our  supply 
of  natural  agents  will  not  be  lessened,  and  may  even  be 
increased.1 

2.  The  destruction  of  capital.  Practically  all  pro- 
duction necessitates  the  destruction  of  a  certain  amount 
of  capital,  both  fixed  and  circulating.  The  cost  to 
society  of  the  capital  consumed  in  production  is  made 
up  of  two  elements,  labor  and  abstinence.  When  capi- 
tal is  consumed,  society  loses  first  of  all  the  labor 
expended  in  producing  the  materials  or  tools  thus 
destroyed.      Second,   it   should   be   noticed   that   absti- 

1  Read  Marsh,  "  The  Earth  as  Modified  by  Human  Action,"  for  a  noble 
plea  for  economy  in  the  use  of  all  natural  agents.  See  also  Jeyons,  "  The 
Coal  Question." 


164  PRINCIPLES   OF  ECONOMICS. 

nence,  or  waiting,  was  necessary  for  the  formation  of 
the  original  capital,  and  will  be  necessary  for  its 
replacement. 

3.  Labor.  Not  only  is  labor  required  to  produce 
capital,  but  also  it  must  be  exerted  in  using  capital 
for  the  purpose  of  further  production.  The  social  cost 
of  labor  will  depend  upon  two  elements  :  (a)  the  charac- 
ter and  intensity  of  the  labor,  whether  intellectual  or 
physical,  skilled  or  unskilled  ;  (7>)  the  length  of  time 
during  which  labor  is  exerted. 

V.    The  Investment  of  Labor  and  Capital  upon  Land. 

§  96.   In  productive  industry  it  is  necessary  to  invest 

labor  and  capital  upon  land.     Now  it  is  a  common  fact 

of    experience   that    in    certain    industries, 

The  law  of  '  _  ' 

diminishing  agriculture,  for  instance,  much  less  labor 
and  capital  can  be  invested  upon  each  acre 
of  land  than  in  other  industries,  such  as  manufactures 
and  commerce.  We  have  next  to  investigate  this  ques- 
tion of  the  extent  to  which  it  is  possible  to  invest  labor 
and  capital  upon  a  definite  tract  of  land. 

§  97.  First  we  will  consider  agricultural  industry.    At 

any  given  time  every  farmer  knows  that  there  is  a  point 

The  law  of      beyond  which  it  will  not  pay  him  to  invest 

diminishing     ]a|)or  an(j  capital  upon  each  acre  of  land. 

returns  in  r  r 

agriculture.  An  investment  of  five  dollars  per  acre  may 
yield  a  return  of  twelve  bushels  of  wheat.  Possibly  an 
investment  of  ten  dollars  might  have  resulted  in  a  prod- 
uct of  twenty-four  bushels.  But  the  crop  secured  from 
a  single  acre  of  land  cannot,  at  any  given  time,  be  made 


LABOR  AND   CAPITAL    UPON  LAND. 


1G5 


to  double  indefinitely  by  doubling  the  investment  of  labor 
and  capital.  To  continue  our  illustration,  suppose  that 
fifteen  dollars  had  been  invested  upon  the  given  acre  of 
land  instead  of  ten  dollars.  Then  it  is  probable  that 
the  crop  would  have  been  increased,  but  it  is  not  likely 
that  it  would  have  amounted  to  thirty-six  bushels.  Sup- 
pose the  investment  of  fifteen  dollars  to  yield  a  crop  of 
thirty  bushels.  Then  the  results  of  investing  the  three 
different  amounts  of  capital  upon  the  given  acre  of  land 
would  have  been  as  follows :  — 


Investment. 

Crop. 

Average  Yield  to  each  Dollar 
of  Labor  and  Capital. 

$5 

$10 

$16 

12  bushels 
24  bushels 
30  bushels 

2.4  bushels 
2.4  bushels 
2.0  bushels 

It  is  evident  that,  on  the  piece  of  land  in  question,  an 
investment  of  fifteen  dollars  will  secure  a  larger  yield 
than  an  investment  of  ten  dollars ;  but  that  the  average 
yield  secured  by  each  dollar  of  labor  and  capital  is  less 
than  it  would  have  been  had  the  investment  been  limited 
to  ten  dollars.  It  would  have  been  better  if  the  third 
five-dollar  investment  had  been  made  upon  another 
piece  of  land.  This  is  an  illustration  of  the  method  in 
which  a  law  of  diminishing  returns  operates  in  agricul- 
ture. As  the  investment  of  labor  and  capital  upon  an 
acre  of  land  increases,  a  point  is  finally  reached  beyond 
which  an  increased  investment  would  yield  a  larger 
aggregate  but  a  smaller  proportionate  return.      If  this 


166  PRINCIPLES  OF  ECONOMICS. 

were  not  true,  we  should  continue  to  raise  all  our  agri- 
cultural produce  from  a  few  acres  of  land,  and  would 
never  have  taken  the  trouble  to  reduce  other  fields  to  a 
condition  suitable  for  cultivation. 

It  will  be  noticed  that  care  was  taken  to  say  that  the 

law  of  diminishing  returns  is  true  at  any  given  time.    In 

any  season,  when  labor  and  capital  are  in- 

The  effect  of  .  . 

improvements  vested  in  the  cultivation  of  land,  agricul- 
magnc  e,^ura]  methods  and  skill  have  reached  a 
certain  stage  of  advancement,  and  will  not  be  materi- 
ally changed  during  that  season.  They  are,  therefore, 
relatively  fixed  ;  so  that  the  economist  can  say  that,  at 
any  given  time,  investments  of  labor  and  capital  can  be 
carried  only  to  a  certain  point  before  they  will  begin  to 
yield  a  diminishing  return.  On  the  other  hand,  if  we 
compare  one  season  with  another,  or  compare  one  period 
of  years  with  another,  no  law  of  diminishing  returns 
may  be  found  to  hold  true.  Scientific  agriculture  is 
each  year  making  it  possible  to  invest  more  capital  upon 
land  without  encountering  a  point  of  diminishing  re- 
turns. Continuing  our  illustration,  we  may  suppose 
that  improved  methods  of  cultivation  are  originated, 
and  that  these  improvements  make  it  possible  to  invest 
fifteen  dollars  upon  each  acre  of  land,  and  to  secure  an 
average  yield  of  thirty-six  bushels  per  acre.  The  law 
of  diminishing  returns,  therefore,  is  true  only  at  a  given 
time.  At  one  season  it  is  possible  to  invest  only  ten  or 
fifteen  dollars  in  cultivating  each  acre  of  wheat  before 
arriving  at  a  point  of  diminishing  returns.  Improved 
methods  of  farming   may,  however,  after   a    period  of 


LABOR  AND   CAPITAL    UPON  LAND.  167 

years  make  it  possible  to  invest  fifteen  or  twenty  dollars 
on  each  acre,  and  to  secure  a  proportionately  increased 
return.  Bearing  these  considerations  in  mind,  we  can 
state  the  law  of  diminishing  returns  as  Professor  Mar- 
shall has  formulated  it :  "  An  increase  in  the  capital  and 
labor  applied  in  the  cultivation  of  land  causes  in  general 
a  less  than  proportionate  increase  in  the  amount  of  prod- 
uce raised,  unless  it  happens  to  coincide  with  an  im- 
provement in  the  arts  of  agriculture." 

We  have  seen  elsewhere  that  the  population  of  civi- 
lized countries  is  increasing,  and  is  likely  to  increase  for 
a  considerable  time  to  come.     This  fact  will  T    ,.   „ 

Implications 

make  it  necessary  to  raise  more  agricultural  of  the  law  of 
products  as  fast  as  numbers  increase.     The  returns  in  ag- 
law  of  diminishing  returns  has  sometimes  "^t^""6, 
been  considered   to   imply   that,   when   all   lands   now 
vacant  shall   have   become    occupied,  men  will  secure 
increased  supplies  of  agricultural  products  only  by  ap- 
plying more  and  more  capital  and  labor  to  land  that 
will  yield  a  constantly  diminishing  return.     Such  a  con- 
clusion is  wholly  unwarranted.     From  year  to  year  the 
progress  of  agriculture  is  making  it  easier  than  ever 
before  to  secure   the   products   of  the   soil.     There  is 
reason  for  thinking  that  scientific  agriculture  is  only  in 
its  infancy,  and  that  in  the  future  its  progress  will  be 
much  more  rapid  than  in  the  past. 

§  98.  It  is  often  overlooked  that  manufactures  are 
subject  to  a  law  of  diminishing  returns.  If  capital  is 
constantly  invested  on  a  single  acre  of  land,  a  point  is 
finally  reached  where  it   will  lie  more   profitable  to  in- 


168  PRINCIPLES  OF  ECONOMICS. 

vest  further  capital  elsewhere.      Suppose  a  factory  to 
cover  an  acre  of  ground.     On  each  story  of  the  build- 
ing only  a  certain   number  of  laborers  and 
diminishing     machines  can  be  employed.     If  the  invest- 

returnsin       ment    of    capital    is    increased,    additional 
manufactures. 

stories  will  have  to  be  added  to  the  building. 
Xow  there  are  definite  limits  to  the  number  of  stories 
that  can  be  used  economically  in  a  factory  building. 
The  older  factories  are  four  or  five  stories  high,  but 
modern  factory  construction  favors  one  or  two  story 
buildings.  In  such  a  low  building  it  is  found  that  the 
largest  return  can  usually  be  secured  from  each  dollar 
of  invested  capital.  The  expenses  for  elevators,  heavier 
walls,  and  greater  fire  risks,  combined  with  the  reason 
that  the  factory  can  be  less  conveniently  arranged  and 
managed,  make  high  buildings  less  desirable  for  manu- 
facturing purposes.  The  law  of  diminishing  returns, 
therefore,  applies  to  manufactures.  When  a  certain 
amount  of  labor  and  capital  has  been  invested  on  a 
single  acre  of  land,  a  larger  return  can  be  secured  for 
future  investments  by  placing  them  on  a  new  piece  of 
ground.  Manufacturing  industries,  however,  permit  a 
much  larger  investment  to  be  made  on  each  acre  of 
land  than  can  be  made  in  agriculture.  It  is  easy  to 
invest  several  hundred  thousand  dollars  upon  an  acre 
of  land  devoted  to  manufacturing  industry  before  the 
point  of  diminishing  returns  is  reached.  In  most  kinds 
of  agricultural  industry  only  a  fraction  of  one  per  cent  of 
this  amount  can  be  invested. 

§  i>(>.    In  other  industries  the  greatest  differences  exist 


LABOR   AND   CAPITAL    UPON  LAND.  169 

in  respect  to  the  amounts  of  labor  and  capital  that  can 
be  invested  before  the  point  of  diminishing    _,   .      , 

1  °     The  law  of 

returns  is  reached.     Mining  is  most  decid-    diminishing 

,,.....  returns  in 

edly  an  industry  of  diminishing  returns.1  other 
As  surface  deposits  are  exhausted,  shafts 
must  be  driven  further  into  the  earth,  at  greater  expense 
and  with  a  rapidly  diminishing  return.  In  commercial 
industries  very  large  investments  can  be  made  upon 
each  acre  of  land.  In  cities,  buildings  that  cost  several 
million  dollars  are  built  upon  land  that  costs  hundreds  of 
thousands,  or  even  more  than  a  million,  dollars  per  acre. 
Such  investments  frequently  amount  to  $2, 000,000 
per  acre.  Yet,  even  here,  the  point  of  diminishing 
returns  is  ultimately  reached.  The  tallest  office  build- 
ings cannot  be  raised  above  a  certain  height  except  at  a 
rapidly' increasing  expense.  When  such  buildings  are 
placed  close  together,  very  large  areas  have  to  be  left 
vacant  in  order  to  secure  the  necessary  amount  of  air  and 
light.  At  the  present  time  our  tall  buildings  are  usu- 
ally isolated,  and  secure  sufficient  air  and  light  because 
they  tower  above  neighboring  structures.  If  all  the 
office  buildings  of  the  business  portion  of  a  city  should 
be  constructed  on  this  plan,  large  areas  would  neces- 
sarily be  left  vacant  to  serve  as  air  spaces.  As  the 
height  of  the  buildings  increased,  the  open  area  would 
have  to  be  larger,  and  would  finally  more  than  counter- 

1  Ultimately,  of  coarse,  a  point  of  exhaustion  is  reached.  In  agricul- 
ture no  such  condition  need  be  reached,  but  land  may  improve  after  hun- 
dreds of  years  of  careful  cultivation.  The  law  of  diminishing  returns  has 
nothing  to  do  with  the  exhaustion  of  the  soil. 


170  PRINCIPLES  OF  ECONOMICS. 

balance  any  gain  of  space  secured  by  constructing  addi- 
tional stories.  The  necessity  of  providing  prompt 
elevator  service  is  another  force  that  tends  to  the  same 
result.  The  number  of  elevators  must  be  largely  in- 
creased as  the  height  of  the  building  increases.  The 
increased  room  devoted  to  elevators  tends  finally  to 
counterbalance  the  gain  of  space  secured  by  construct- 
ing higher  buildings. 

It   appears   that   a   point   of   diminishing   returns  is 

reached  ultimately  in  all  productive  industries  located 

upon  a  given  area  of  ground.      Sooner  or 

Summary.         .  . 

later  there  comes  a  time  when  a  larger  re- 
turn can  be  secured  by  investing  labor  and  capital  upon 
other  tracts.  In  agriculture  the  point  of  diminishing 
returns  is  reached  with  much  smaller  investments  than 
in  manufactures  or  commerce,  but  all  these  industries 
differ  merely  in  the  degree  to  which  they  admit  of  an 
intensive  investment  of  labor  and  capital.  Again,  the 
law  of  diminishing  returns  is  true  only  at  a  given  period 
of  time  ;  and,  from  year  to  year,  inventions  and  dis- 
coveries increase  the  amount  of  labor  and  capital  that 
can  be  invested  on  each  acre  of  land  without  causing  a 
decrease  in  the  return  to  each  unit  of  investment. 

VI.    Large-Scale  Production. 

§  100.    During  the  present   century    there    has  been 
a   remarkable     concentration    of    productive    industry, 
concentration  Formerly  the  amount  of  capital  and  labor 
in  production,  combined    in    the    average   business   enter- 
prise was  far  smaller  than  it  is  to-day,  while  the  concen- 


LARGE-SCALE  PRODUCTION. 


171 


tration  of  production  in  large  establishments  is  more 
marked  at  the  present  moment  than  ever  before.  A 
few  statistics  will  show  how  greatly  the  size  of  the 
average  business  establishment  has  increased.  First 
may  be  presented  the  census  statistics  of  all  manufac- 
tures of  the  United  States  from  1850  to  1890. 


1850. 

1860. 

1870. 

1880. 

1890. 

Average  Product  of  each  Manufactur-  ) 

Average  Capital  of  each  Manufacturing  | 

Average  Number  of  Employees  in  each  1 
Manufacturing  Establishment      .     .  J 

$8,280 

$4,330 

7.7 

$13,420 

$7,190 

9.3 

$13,420 

$6,720 

8.1 

$21,100 

$10,960 

10.6 

$28,070 

$19,020 

13.8 

This  process  of  concentration  is  much  more  marked  in 
the  textile  industries,  as  shown  by  the  statistics  of  the 
last  five  census  years :  — 


1850. 

1860. 

1870. 

1880. 

1890. 

Number  of  Establishments  .     .     . 
Average  Product  of  each  Textile  1 

Average  Capital   of  each  Textile  1 

Average  Number  of  Employees  of  1 
each  Textile  Manufactory      .    .  J 

3,025 

$42,560 

$37,190 
48.5 

3,027 

$70,940 

$49,580 
64.1 

4,790 
$108,640 

$62,140 

57.4 

4,018 
$132,570 

$102,710 

95.6 

4,114 

$175,480 

$179,860 
124.4 

Again,  the  iron  and  steel  industries  show  even  a  greater 
decree  of  concentration  :  — 


1870. 

1880. 

1890. 

Number  of  Establishments     .... 
Average  Product  of  each  Iron  and  Steel  ( 

Manufactory .     .  1 

Average  Capitol  of  each  Irou  and  Steel  | 

Average  Number  of  Employees  of  each  1 
Irou  and  Steel  Manufactory    .    .    . ) 

808 
$256,440 

$150,700 

95.9 

792 

$374,410 

$265,030 
177  7 

719 
$665,760 

$575,860 

244.1 

172  PRINCIPLES   OF  ECONOMICS. 

§  101.    Modern  production  tends  to  become  concen- 
trated in  large  establishments  for   the  reason    that  it 

can    be    carried    on  most     economically   in 
Reasons  for  J 

the  growth  of  that  manner.     Large-scale    production  may 

production  ,       ,.  . ,        . 

on  a  large       secure  the  following  economies  :  — 
scale•  1.    Economy    in    fixed    capital.      Modern 

machinery  is  expensive,  and  requires  expensive  factory 
buildings.  Machine  production,  therefore,  necessitates 
a  very  large  outlay  for  fixed  capital ;  and  this  element 
of  investment  tends  to  increase  each  year.  The  statis- 
tics just  presented  show  that,  in  the  United  States,  the 
average  amount  of  capital  invested  in  a  manufacturing 
establishment  was  about  four  and  a  half  times  as  great 
in  1890  as  it  was  in  1850,  while  at  the  same  time  the 
average  number  of  laborers  employed  is  less  than  twice 
as  large.  In  the  textile  industries  they  show  that,  while 
the  amount  of  capital  invested  in  the  average  establish- 
ment has  increased  to  five  times  the  figures  for  1850, 
the  average  number  of  laborers  employed  has  increased 
less  than  three  times.  In  the  iron  and  steel  industries 
it  appears  that  the  average  investment  of  capital  is 
nearly  four  times  as  large  as  it  was  thirty  years  ago, 
while  the  average  number  of  employees  is  only  two  and 
one  half  times  as  large.  It  is  evident,  therefore,  that 
the  cost  of  fixed  capital  is  an  increasing  element  in  the 
cost  of  production.  Now  the  cost  of  the  fixed  capital 
often  docs  not  increase  proportionately  as  the  product  of 
the  factory  increases.  For  this  reason  such  costs  are 
termed  the  "  fixed  charges"  of  a  business,  since  within 
certain  limits  they  do  not  vary  much,  as  the  amount  of 


LARGE-SCALE  rilODUCTION.  173 

business  is  larger  or  smaller.  One  large  building  may 
cost  less  than  two  small  ones,  while  it  may  furnish  room 
for  the  same  amount  of  machinery.  Generally  a  smaller 
expenditure  for  engines  and  other  machinery  will  enable 
one  large  factory  to  turn  out  as  large  a  product  as  two 
small  ones.  This  is  because  no  machine  is  needlessly 
duplicated  in  the  large  factory,  while  in  the  two  smaller 
factories  some  of  the  machinery  may  be  only  half  util- 
ized for  a  considerable  portion  of  the  time.  This  often 
happens  when  costly  machinery  is  required  to  perform 
some  short  operation,  and  would  remain  idle  much  of 
each  day  in  a  small  factory  where  the  product  is  not 
large  enough  to  keep  the  machine  constantly  employed. 
Steam  railroads,  gas  and  electric-light  works,  and  street 
railways  are  the  most  common  illustrations  of  businesses 
that  require  very  large  outlays  of  fixed  capital.  In 
these  industries  one  company  can,  manifestly,  supply 
the  same  territory  with  very  much  less  unnecessary 
reduplication  of  tracks,  gas  pipes,  electric  wires,  etc., 
than  two  companies  would  require.  But  the  same  thing 
is  true,  although  sometimes  to  a  less  extent,  of  giant 
factories  in  which  hundreds  of  thousands  or  even  several 
millions  of  dollars  are  invested  in  land,  buildings,  and 
expensive  machinery.  In  general,  it  may  be  said,  that 
the  larger  the  outlay  of  fixed  capital,  the  greater  are 
the  economics  that  result  from  the  concentration  of 
production  in  a  small  number  of  large  establishments. 
If  the  annual  expenses  for  interest  and  replacement  of 
fixed  capital  are  $300,000  in  any  business,  and  the 
product  is  $1,000,000,  then  the  costs  of  the  fixed  capital 


174  PRINCIPLES  OF  ECONOMICS. 

will  be  thirty  cents  for  each  dollar  of  product.  Now  if 
the  output  of  the  business  be  increased  to  81,500,000  by 
merely  utilizing  the  machinery  to  the  greatest  degree 
possible,  then  the  costs  of  the  fixed  capital  will  be  only 
twenty  cents. 

2.  Economy  may  also  be  effected  in  the  circulating 
capital.  Less  coal  or  lubricating  oil  may  be  required  in 
one  large  factory  than  in  two  small  ones.  A  large  store 
need  not  have  on  hand  at  all  times  twice  the  stock  of 
finished  products  that  two  small  stores  may  require  in 
order  to  enable  them  to  meet  any  probable  demand  of 
their  customers. 

3.  In  experimenting  with  new  methods  and  invent- 
ing new  machinery,  a  large  concern  has  a  great  advan- 
tage over  a  small  one.  Invention  and  experiment  are 
often  expensive  processes  which  only  a  business  pos- 
sessed of  large  capital  can  afford.  Some  large  concerns 
keep  scientists  and  inventors  at  work  endeavoring  to 
improve  the  processes  by  which  production  is  carried  on. 

4.  Large-scale  production  often  results  in  an  econ- 
omy of  skill.  Labor  can  be  much  more  efficiently  sub- 
divided in  a  large  business  undertaking.  Out  of  a  great 
number  of  employees  men  of  exceptional  talents  can  be 
selected  for  the  particular  lines  of  work  for  which  they 
are  best  fitted.  A  high  specialization  of  work  and  a 
greater  efficiency  in  the  application  of  labor  can  lie 
secured  in  this  way.  Sometimes  an  absolute  saving 
may  be  effected  in  the  amount  of  labor  required  to  do 
the  same  work.  It  is  said  that  a  steamer  of  two  hun- 
dred or  three  hundred  tons'  burden  needs  one  sailor  for 


LARGE-SCALE  PRODUCTION.  175 

every  19.8  tons  of  cargo  carried,  while  a  steamer  of  eight 
hundred  to  one  thousand  tons  requires  only  one  sailor 
for  each  41.5  tons.  In  many  departments  of  production 
only  a  portion  of  the  raw  materials  can  be  used  for  the 
purpose  of  producing  the  main  products  of  each  business. 
A  considerable  part  of  the  raw  material  becomes  waste 
unless  some  means  can  be  found  to  utilize  it.  In  a  large 
business  the  amount  of  waste  material  is  very  great,  and 
the  incentive  for  saving  it  is  correspondingly  increased. 
In  refining  petroleum,  material  which  was  formerly 
wasted  is  now  utilized  for  the  production  of  lubricating 
oil,  naphtha,  and  paraffine.  So  in  the  business  of  beef 
and  pork  packing,  a  more  complete  utilization  of  every 
part  of  the  animal  is  effected  in  large  establishments 
than  could  be  secured  in  any  other  way.  Hides,  hoofs, 
horns,  bones,  blood,  bristles,  hair,  are  utilized  in  the 
production  of  leather,  glue,  fertilizers,  etc. 

5.  Large  business  establishments  can  effect  savings 
by  carrying  on  for  themselves  allied  or  subsidiary  prof- 
esses. Large  oil  refiners  make  their  own  barrels,  tin 
cans,  tanks,  pumps,  sulphuric  acid,  etc.  Large  sugar 
refiners  import  their  own  raw  sugar,  own  their  own 
wharves  and  warehouses,  and  make  their  own  barrels 
and  boxes. 

§  102.  But  we  should  not  overlook  certain  very  im- 
portant facts  which  have  a  tendency  to  diminish  the  ad- 
vantages of  large  over  small-scale  production,  counteract- 

1.    In  not  a  few    industries   a   factory   of  "^ forces- 
moderate  size  will  secure  the  maximum  efficiency  of  both 
buildings  and  machinery,  so  that  little  or  no  saving  of 


176  PRINCIPLES   OF  ECONOMICS. 

fixed  capital  is  effected  by  increasing  a  business  beyond 
this  point.  Professor  Marshall  mentions  cotton  spin- 
ning and  calico  weaving*  as  examples  of  this  sort  of 
industries. 

2.  Power  is  sometimes  distributed  from  factory  to 
factory  from  a  central  engine  and  boiler  house.  This  is 
often  done  in  the  case  of  steam  power,  and  will  be  done 
to  a  still  greater  extent  when  electricity  comes  into  more 
general  use.  Such  a  device  places  the  small  producer 
nearly  on  a  plane  of  equality  with  the  large  so  far  as  the 
cost  of  power  is  concerned. 

3.  New  processes  and  improved  machinery  are  often 
given  publicity  at  the  present  day.  Trade  papers  make 
a  business  of  disseminating  such  information.  The  most 
improved  machinery  often  can  be  bought  by  the  small 
as  well  as  by  the  large  producer. 

4.  Small  establishments  of  the  same  sort  may  often 
be  located  in  the  same  vicinity.  When  this  happens, 
smaller  producers  may  cooperate  to  secure  many  of  the 
advantages  which  large-scale  production  gives.  They 
may  and  do  combine  to  own  pipe  lines,  by  which  crude 
petroleum  is  carried  from  the  oil  fields  to  distant  refin- 
eries ;  they  may  cooperate  in  collecting  and  utilizing 
waste  products,  as  the  independent  oil  refiners  often  do. 

5.  Finally,  it  must  be  admitted  that  large  business 
establishments  often  cannot  be  as  carefully  superin- 
tended in  all  their  brandies  as  a  small  business  which 
is  under  the  eye  of  the  individual  proprietor.  There  is 
a  great  deal  of  truth  in  Adam  Smith's  remark  that  the 
hired  superintendent  who  manages  other  people's  capital 


LARGE-SCALE  PRODUCTION.  177 

is  generally  less  watchful  and  alert  than  business  part- 
ners who  manage  their  own  property. 

G.  In  conclusion,  it  must  not  be  forgotten  that  large- 
scale  production  docs  not  necessarily  mean  monopoly, — 
that  is,  the  concentration  of  the  production  of  the  entire 
supply  of  a  commodity  in  the  hands  of  one  group  of  pro- 
ducers. This  has  often  been  the  result  in  the  case  of 
steam  and  street  railways,  or  of  gas  and  electric-light 
companies  ;  but  in  other  cases  the  result  has  been  to 
replace  a  multitude  of  small  undertakings  by  a  few  large 
enterprises.  It  is  sometimes  claimed  that  the  economies 
secured  by  large-scale  production  are  so  great  that  the 
final  result  will  be  the  concentration  of  all  production  in 
the  hands  of  giant  monopolies.  This  is  a  question  which 
will  be  discussed  elsewhere. 

§  103.   The   combination   of    small   enterprises   into 
large  was  first  noticed  in  the  case  of  those  industries 
which  furnish  commodities  or  services  that  Large  produc- 
can   be  consumed  only    in   immediate  con-  ^"branches 
nection  with  the  business  plants.     Gas,  elec-  of  industry. 
tricity,  water,  and  transportation  facilities  are  examples 
of  such  goods.     Men  were  not  long  in  finding  out  that 
one  gas  company  can  furnish  gas  more  cheaply  than  two 
companies  can  afford  to  do,  and  that  between  two  cities 
one  railroad  can  give  cheaper  and  better  service  than 
two  roads.     A  tendency  to  large-scale  production   was 
next  noticed  in  manufactures,  wherever  large  plants  or 
large    investments    of   land,    buildings,   and  machinery 
were  required.     It  is  possible  to  concentrate  economi- 
cally a  great  deal  of  capital  upon  each   acre  of  land 

12 


178  PRINCIPLES  OF  ECONOMICS. 

devoted  to  manufacture.  In  agriculture,  large-scale 
production  has  been  much  less  successful.  It  is 
claimed,  with  apparent  reason,  that  the  largest  crop  can 
be  secured  from  each  piece  of  land  only  by  studying 
carefully  the  peculiarities  of  every  acre  of  soil.  Each 
five-acre  tract  may  be  best  suited  for  raising  a  different 
crop.  Only  on  a  small  farm  can  a  proprietor  study  with 
sufficient  care  the  varying  capability  of  the  soil,  and  so 
secure  the  greatest  possible  product  from  each  acre.  In 
the  United  States  the  tendency  in  recent  years  has  been 
to  cut  large  farms  up  into  small  ones.  Yet  there  have 
been,  and  are  still,  some  instances  of  large-scale  farm- 
ing carried  on  successfully  with  heavy  investments  of 
capital. 


U 


LITERATURE.  179 


LITERATURE   ON   CHAPTER  VI. 

General  References  as  in  the  last  Chapter. 

On  the  Forms  of  Business  Undertakings:  Lalor,  Cyclopaedia 
of  Political  Science,  "Corporations;"  Johnson's  Cyclopaedia, 
"Partnership,"  "Joint-Stock  Companies;"  Robinson,  Elemen- 
tary Law;  Holland,  Jurisprudence,  84-85,  288-297,  257,  258; 
Nicholson,  Political  Economy,  131-137;  Hadley,  Economics, 
1 13-146. 

On  the  Economic  Functions  of  The  State :  Wilson,  The 
State,  G37-G40;  Ely,  Outlines  of  Economics,  257-300;  Earrer, 
The  State  in  its  Relation  to  Trade.  Upon  the  right  of  private 
property,  see  Holland,  Jurisprudence,  175  et  seq.  ;  Robinson, 
Elementary  Law,  22-34;  Mill,  Political  Economy,  Bk.  II.,  Chaps. 
1  and  2  ;  Gide,  Political  Economy,  430-455  ;  Hadley,  Economics, 
Chap.  2. 

On  the  Law  of  Diminishing  Returns  :  See,  besides  general 
references,  Commons,  The  Distribution  of  Wealth,  116-159. 

On  Large-scale  Production  :  See,  besides  general  references, 
Hadley,  Economics,  Chap.  6;  Hobson,  The  Evolution  of  Modern 
Capitalism,  1-142. 


180  PRINCIPLES   OF  ECONOMICS. 


CHAPTER   VII. 

THE   THEORY   OF   EXCHANGE. 

I.    Exchange  in  General. 

§  104.  The  process  of  exchanging  products  has  not 
always  been  as  important  and  as  widely  extended  as  it  is 
Development  m  the  life  °f  the  most  advanced  modern 
of  exchange,  nations.  Among  uncivilized  or  semi-civil- 
ized peoples,  who  live  in  the  hunting,  the  pastoral,  or  the 
agricultural  stages,  each  family  produces  all  or  nearly  all 
the  goods  which  it  consumes.  Commerce  is  confined  to 
the  exchange  of  easily  transportable  articles,  which  have 
large  value  in  small  bulk,  such  as  precious  stones  and 
metals,  ivory,  spices,  fine  fabrics,  etc.  Prior  to  the 
present  century,  when  Europe  was  in  the  trades  and 
commerce  stage,  most  of  the  products  of  industry  wrere 
consumed  in  the  places  where  they  were  produced  ;  and 
bulky  or  perishable  commodities  had  not  become  objects 
of  exchange  between  distant  places.  Then  began  the 
era  of  canals,  steamships,  and  steam  railroads.  This 
made  possible  wide-spread  exchanges  of  all  products, 
even  the  most  bulky  and  perishable.  Before  the  con- 
st rncf  ion  of  railways  in  the  United  States,  most  commu- 
nities that  were  not  situated  along  navigable  water 
courses  were  self-sustaining  economic  units;  and  were 


EXCHANGE.  181 

hound  to  neighboring  communities  by  few  ties  of  com 
mercial  intercourse. 

§  105.   The  idea  was  once  common  that  an  exchange 
of   products  could   profit  only  one   of   the  two   parties 
effecting-  it,  and  that  what  one  gained  the    Advantages 
other  must  necessarily  lose.     The  falsity  of    of  exchange. 
this  view  will  be  made  clear  by  considering  the  reasons 
why  men  desire  to  exchange  the  products  of  their  labor. 

1.  Individuals,  communities,  and  even  nations  differ 
most  widely  in  tastes  and  customs.  One  man  or  one 
community  may  prize  most  highly  a  commodity  which 
will  possess  little  value  for  another  person  or  another 
community.  Under  such  circumstances,  an  exchange 
will  place  each  commodity  where  it  will  have  the  great- 
est utility.  Such  an  exchange  results  in  an  increase  of 
utility. 

2.  Both  individuals  and  communities  have  different 
aptitudes  for  the  various  kinds  of  productive  labor. 
These  differences  may  be  either  original  or  acquired, 
but  at  any  given  time  they  are  very  marked.  Now  the 
exchange  of  products  makes  it  possible  for  each  person 
to  devote  himself  to  that  line  of  production  for  which 
his  natural  ability  or  his  training  best  fit  him.  By  doing 
this,  both  individuals  and  communities  can  increase  the 
productivity  of  their  labor. 

3.  Again,  it  happens  that  persons  and  communities 
have  different  natural  environments.  Arable  lands,  pas- 
ture lands,  forests,  mineral  wealth,  sea  fisheries,  water 
powers,  or  navigable  waters  are  either  not  available  for 
all  communities,  or  not  available  in  equal  degree.     By 


182  PRINCIPLES  OF  ECONOMICS. 

exchanging  cotton  cloth  for  wheat,  Massachusetts  has 
been  enriched  by  the  fertile  prairies  of  the  West;  while 
Kansas  and  Iowa  have  had  the  benefit  of  the  water 
powers  of  the  New  England  rivers.  To  quote  from 
Professor  de  Laveleye,  "  The  poorest  workman  con- 
sumes the  products  of  two  hemispheres.  The  wool 
for  his  clothes  comes  from  Australia ;  the  rice  for  his 
pudding  from  the  Indies  ;  the  wheat  for  his  bread  from 
Illinois  ;  the  petroleum  for  his  lamp  from  Pennsylvania ; 
his  coffee  from  Java ;  the  cotton  for  his  wife's  dress 
from  Egypt  or  from  Alabama  ;  his  knife  from  Sheffield ; 
the  silk  of  his  necktie  from  France." 

4.  In  all  these  cases  it  is  apparent  that  both  parties 
to  an  exchange  may  and  do  profit  thereby.  It  is  possi- 
ble, of  course,  that  in  many  exchanges  one  person  may  be 
cheated  ;  but  such  is  not  the  case  in  the  majority  of  the 
exchanges  which  are  effected  each  day  in  the  world  of 
commerce.  As  a  matter  of  fact,  we  have  seen  that  the 
exchange  of  products  is  a  necessary  and  indispensable 
part  of  the  modern  process  of  wealth  production. 

§  106.   An  elaborate  mechanism  has  gradually  been 

developed  for  the  purpose  of  facilitating  the 
The  median-  ' 

ism  of  ex-       exchange  of  products. 

1.   There  has  grown  up  a  separate  class 

of  middlemen,  who  devote  their  entire  time  to  the  work 

of  exchange. 

2.    Means  of  transporting  persons  and  products  have 

been  developed  largely  for  the  purpose  of  aiding  the 

process  of  exchange.     From  the  caravan  to  the  steam 

railroad,  systems  of  transportation  have  in  view  chiefly 


VALUE.  183 

the  needs  of  commerce.  Even  the  post  office,  the  tele- 
graph, and  the  telephone  are  used  chiefly  for  this  pur- 
pose ;  and  they  have  facilitated  in  a  wonderful  manner 
the  commerce  of  the  world. 

3.  Systems  of  weights  and  measures  were  instituted 
by  private  individuals,  but  their  importance  in  the  ex- 
change of  products  is  so  great  that  governments  have 
assumed  the  work  of  regulating  them  in  such  a  manner 
as  to  secure  greater  certainty  and  uniformity.  In  time 
a  single  system  of  weights  and  measures  is  likely  to 
prevail  in  all  civilized  countries. 

4.  Money  and  credit  are  institutions  called  into 
being  by  the  needs  of  trade.  They  are  so  important  as 
to  require  consideration  in  a  separate  chapter. 

5.  Finally,  modern  commerce  requires  a  great  deal 
of  legislation  and  commercial  administration  by  all  the 
governments  of  the  world.  Laws  relating  to  debts,  to 
bankruptcy,  to  the  regulation  of  railroads,  and  to  the 
inspection  of  certain  products  are  instances  of  this  sort. 
Governments  maintain  consular  services  in  foreign  coun- 
tries largely  for  the  purpose  of  promoting  commercial 
interests,  while  they  collect  and  publish  information 
concerning  the  commerce  of  the  world. 

II.  Value. 

§  107.    In  the  course  of  trade,  commodities  exchange 
for  each  other  in  certain  definite  proportions.    A  bushel 
of  wheat  may  be  exchanged  for  two  bushels  value  and 
of   oats,  or  two   tons   of   pig  iron   may   be  prIce- 
required   to   purchase    one   ton   of   steel   rails.      When 


184  PRINCIPLES   OF  ECONOMICS. 

this  occurs,  wheat  is  said  to  be  twice  as  valuable  as  oats, 
and  the  value  of  steel  rails  is  said  to  be  twice  as  great  as 
the  value  of  pig  iron.  It  appears,  therefore,  that  the 
word  "  value"  refers  to  the  proportions  in  which  commodi- 
ties exchange  for  one  another.  For  this  reason  it  has 
often  been  called  "exchange  value,"  and  we  may  define 
it  as  the  power  of  a  commodity  to  command  other  com- 
modities in  exchange.  The  value  of  all  kinds  of  mer- 
chandise is  commonly  expressed  in  terms  of  money. 
We  say  that  wheat  is  valued  at  seventy  cents  a  bushel 
and  oats  are  valued  at  thirty-five.  Values  thus  ex- 
pressed in  money  are  termed  prices.  Money  offers  us 
in  this  way  a  very  convenient  method  for  comparing 
the  values  of  all  commodities.  Suppose  that  wheat  ex- 
changes for  seventy  cents  in  money,  oats  for  thirty-five 
cents,  and  corn  for  fifty  cents.  Then,  without  making 
comparisons  of  wheat  and  oats,  or  of  oats  and  corn,  we 
can  determine  the  relative  values  of  those  commodities 
by  merely  observing  what  their  prices  are  ;  that  is,  by 
observing  in  what  proportions  they  exchange  for  money. 

§  108.    Whenever  we  say  that  the  price  of  pig  iron  is, 
for  instance,  thirteen  dollars  a  ton,  we  refer  to  its  price 

Definition  of    m  a  certain  market,  and  at  a  certain  time. 

a  market.  Between  two  different  markets  Iherc  may  be 
differences  in  the  prices  at  which  pig  iron  sells,  while 
from  one  time  to  another  prices  may  vary  widely.  But 
it  is  necessary  to  have  clear  ideas  of  just  what  consti- 
tutes a  market.  A  market  exists  when  purchasers  and 
sellers  of  a  single  commodity  come  together  in  such 
freedom  of  intercourse  that  they  establish  a  single  price 


VALUE  185 

at  which  the  commodity  exchanges.  It  is  evident,  there- 
fore, that  each  commodity  has  a  separate  market;  and 
that  we  may  speak  of  the  iron  market,  the  wheat  mar- 
ket, eic,  since  the  dealers  in  iron  and  wheat  do  not 
compete  with  each  other  in  the  establishment  of  a  single 
price  for  both  commodities.  In  the  second  place,  it  will 
be  evident  that  some  markets  will  be  far  more  extended 
than  others.  Wholesale  dealers  generally  take  pains  to 
secure  knowledge  concerning  prices  not  only  in  one  city, 
but  in  a  large  extent  of  territory  ;  while  they  are  ready 
to  place  their  goods  in  distant  markets  whenever  a  differ- 
ence in  prices  makes  it  possible  to  do  so.  The  result  is 
that  wholesale  markets  are  often  as  wide  as  an  entire 
country,  and  sometimes  even  international.  Europe  and 
the  United  States  form  almost  a  single  market  for  such 
a  commodity  as  wheat,  since,  for  instance,  the  wholesale 
markets  of  the  United  States  respond  quite  quickly  to 
changes  of  prices  in  the  English  market.  Retail  dealers 
on  the  contrary,  seldom  compete  for  custom  in  distant 
markets,  and  Know  far  less  about  the  movement  of 
prices  outside  of  their  immediate  neighborhood.  The 
result  is  that  retail  markets  are  limited  to  a  single  lo- 
cality, sometimes  to  a  portion  of  a  single  town  or  city; 
while  retail  prices  may  vary  from  one  town  to  another, 
and  even  from  one  store  to  another. 

§  109.   The  existence  of  a  market  in  which  the  same 
products    exchange  at  a  single  price  generally  presup- 
poses the  existence  of  competition.     In  its 
widest  sense,  competition  denotes  a  struggle 
•)f  conflicting  interests,  in  which  each  person  endeavors 


186  PRINCIPLES   OF  ECONOMICS. 

to  accomplish  his  own  ends,  or  to  secure  some  advan- 
tage to  himself,  in  the  face  of  similar  efforts  on  the 
part  of  his  rivals.  In  a  market,  competition  may  mean 
two  things.  It  may  mean  the  endeavors  of  rival  sellers 
to  exchange  their  goods  or  services  for  the  money  of 
the  buyers;  and,  on  the  other  hand,  the  efforts  of  rival 
buyers  to  purchase  goods  or  services  at  the  lowest  pos- 
sible figure.  In  the  second  place,  it  may  mean  the  proc- 
ess of  bargaining  between  buyers  and  sellers,  in  which 
the  first  set  of  persons  attempts  to  buy  as  cheaply  as 
possible,  while  the  second  endeavors  to  secure  the  high- 
est prices  that  can  be  obtained.  When  there  are  many 
competing  sellers  and  many  competing  buyers,  there  is 
little  occasion  for  any  bargaining  between  buyers  and 
sellers.  In  a  market,  therefore,  the  first  form  of  compe- 
tition is  generally  sufficient  to  establish  a  single  price 
at  which  commodities  sell.  Opposed  to  competition  and 
competitive  prices  are  custom  and  customary  prices. 
The  force  of  custom  may  often  prevent  a  seller  from 
charging  the  full  competitive  price,  or  may  lead  a  buyer 
to  pay  more  than  a  competitive  price.  Competition  may 
also  be  hindered  by  combinations  of  either  sellers  or 
buyers.  When  sellers  combine  and  cease  to  act  in 
rivalry,  they  may  charge  more  than  would  be  possible 
if  they  should  compete.  On  the  other  hand,  combina- 
tions of  buyers  may  depress  prices. 

III.    Market  Value. 

§  110.    We  must  consider  next  the  causes  that  deter- 
mine the  value  of  commodities.     In  so  doing,  we  shall 


MARKET   VALUE.  187 

be  obliged  to  raise  a  number  of  difficult  questions  upon 
which  economists  have  as  yet  failed  to  reach  a  general 
agreement.     The  subject  may  be  most  read- 

s  j  j  Definition 

ily  approached  by  studying  first  the  prob-  of  market 
lems  of  market  value.  During  1895  the 
price  of  a  bushel  of  wheat  in  New  York  varied  from 
fifty-six  to  eighty-three  cents,  and  was  seldom  the  same 
on  any  two  successive  days.  These  changes  of  price 
form  the  market  fluctuations,  and  the  actual  value  in 
the  market  each  day  is  called  the  market  value.  An 
investigation  of  the  manner  in  which  these  market 
values  are  determined  will  show  us  that  they  depend 
upon  the  forces  of  demand  and  supply. 

§  111.    By  demand  is  meant  the  amount,  or  the  num- 
ber of  units,  of  any  commodity  that  consumers  are  ready 

to  purchase  at  a  given  price.    In  the  chapter 

Demand, 
devoted  to  the  consumption  of  wealth,  it  was 

shown  that  the  amount  of  any  commodity  demanded  by 
purchasers  in  any  market  will  vary  according  to,  (1)  the 
marginal  utility  of  the  commodity,  (2)  the  price  re- 
quired in  order  to  purchase  it,  (3)  the  wealth  of  the 
purchasers.  Persons  who  enter  any  market  as  buyers 
commonly  sacrifice  money  in  order  to  secure  commodi- 
ties. Knowing  the  extent  of  their  annual  incomes,  such 
persons  can  and  do  estimate  roughly  the  marginal  utility 
which  a  unit  of  money,  a  dollar,  has  for  them.  When 
they  learn  that  the  price  of  a  commodity  is  a  dollar, 
they  can  and  do  compare  the  marginal  utility  of  the 
commodity  with  the  marginal  utility  of  a  dollar.  They 
will  select,  or  demand,  those  goods  whose  marginal  util- 


188  PRINCIPLES   OF  ECONOMICS. 

ity  most  greatly  exceeds  the  marginal  utility  of  the 
money  required  to  purchase  them.  When  the  utility 
of  any  good  offered  in  the  market  increases,  the  sur- 
plus of  utility  over  costs  is  greater,  and  the  demand  for 
that  good  will  tend  to  increase ;  and  vice-versa.  When 
the  price  of  the  commodity  rises,  the  surplus  of  utility 
over  costs  is  smaller,  and  the  demand  decreases ;  and 
vice-versa.  Finally,  when  the  wealth  of  the  purchaser 
increases,  the  marginal  utility  of  money  to  him  will  fall, 
the  surplus  of  utility  over  costs  will  rise,  and  demand 
will  increase  ;  and  vice-versa. 

§  112.    The    supply    of    commodities    offered    in    the 
modern  market  is  controlled  by  producers  or  middle- 
men who  desire  to  dispose  of  their  entire 

Supply. 

stocks  of  goods  at  the  highest  prices  which 
it  may  be  possible  to  secure.  We  must  distinguish  care- 
fully between  the  terms  "  supply  "  and  "  stock."  The 
stock  of  goods  is  the  absolute  amount  or  number  of  com- 
modities at  the  disposition  of  the  sellers.  The  supply  is 
the  amount  or  number  of  commodities  which  the  sellers 
will  offer  for  sale  at  a  definite  price.  The  supply  will 
generally  be  larger  when  prices  are  high,  and  will  usually 
become  smaller  as  prices  fall.  The  stocks  of  goods 
controlled  by  merchants  have  been  produced  almost 
solely  for  the  purpose  of  exchanging  them  for  money, 
and  the  merchants  have  no  possible  use  for  any  con- 
siderable part  of  such  goods  as  articles  of  personal 
consumption. 

§  113.    Within  any  market  at  any  given  time  prices 
will  be  fixed  at  a  point  where  demand  and  supply  will 


MARKET   VALUE.  189 

be   equalized.      Let   us   suppose  that  the   sellers   in   a 

wheat  market  control  a  stock  of  1,000,000    bushels  of 

wheat.     At  a  price  of   eighty  cents   per  bushel,  all  of 

this  stock  might  be  thrown  upon  the  mar-         ,.    , 

1  Equalization 

ket,  and  the  supply  would  be  1,000,000  of  demand 
bushels.  At  a  price  of  seventy  cents,  only 
800,000  bushels  might  be  offered,  since  some  sellers 
might  prefer  to  hold  their  stocks,  amounting  to  200,000 
bushels,  for  sale  at  a  future  time  when  they  believe  that 
better  prices  could  be  secured.  Again,  a  price  of  sixty 
cents  might  bring  into  the  market  a  supply  of  only 
600,000  bushels,  since  a  larger  number  of  sellers  might 
think  it  worth  while  to  hold  their  stocks  for  sale  at  a 
future  date.  On  the  other  hand,  let  us  suppose  that 
the  buyers  will  demand  1,000,000  bushels  of  wheat  at  a 
price  of  sixty  cents,  800,000  bushels  at  a  price  of  seventy 
cents,  and  only  600,000  bushels  at  a  price  of  eighty 
cents.  Then  seventy  cents  is  the  price  that  will  make 
demand  and  supply  equal,  and  the  market  price  will  be 
fixed  at  seventy  cents  for  the  time.  The  competition  of 
buyers  and  sellers  will  make  no  other  result  possible. 
If  the  bidding  should  raise  the  price  to  seventy-one 
cents,  the  demand  would  straightway  fall  off,  say  to 
780,000  bushels.  Then  some  of  the  sellers  who  would 
be  willing  to  sell  at  seventy  cents  would  find  that  they 
had  lost  a  chance  to  sell  20,000  bushels.  t  At  the  same 
time,  the  higher  price  might  tempt  into  the  compe- 
tition some  of  the  sellers  who  had  refused  to  sell  for 
seventy  cents.  This  would  raise  the  supply  of  wheat 
offered  for  sale,  say  to  820,000  bushels.     It  is  evident, 


190  PRINCIPLES   OF  ECONOMICS. 

therefore,  that  a  price  of  seventy-one  cents  would  de- 
crease the  demand  and  increase  the  supply.  The  result 
would  be  to  stimulate  competition  among  the  sellers, 
none  of  whom  would  want  to  lose  their  chances  of 
effecting  sales,  and  to  cause  some  of  the  sellers  to  lower 
their  prices  to  seventy  cents.  For  similar  reasons,  the 
bidding  could  not  lower  the  price  to  sixty-nine  cents. 
At  that  price  the  demand  would  increase  to  820,000 
bushels,  while  the  supply  would  fall  to  780,000  bushels. 
Competition  among  the  buyers  would  at  once  raise  the 
price  to  seventy  cents. 

§  114.    This  process  of  the  equalization,  through  com- 
petition, of  supply  and  demand  is  illustrated  perfectly 
M  _,  ,  by   the   actual   transactions    of    the    Berlin 

Illustration  of      J 

this  principle  Stock  Exchange.  In  this  exchange  the 
stock  Ex-  persons  who  buy  and  sell  stocks  do  not 
change.  make  their  bargains  directly  with  each  other. 

Each  day  they  submit  to  a  committee  their  bids  for  the 
purchase  of  stocks  or  their  offers  of  stocks  for  sale,  in 
all  cases  specifying  the  prices  and  the  amounts  of  the 
bids  or  the  offerings.  The  committee  examines  all  the 
bids,  or  demands,  for  securities,  and  all  the  offerings,  or 
supplies,  of  securities.  Then  it  establishes  a  settling 
price  which  will  allow  the  largest  number  of  exchanges 
to  be  effected. 

In  such  an  exchange  let  us  suppose  that  the  bids  and 
offerings  of  a  certain  stock  are  represented  by  the  fol- 
lowing table : — 


MARKET    VALUE. 


191 


Demand. 

Supply. 

Bids. 

Numbe 
share 

r  of           „  . 

Price. 

Offers. 

Number  of 
shares. 

Price. 

1 

10  sha 

res         $100 

1 

10  shares 

$92 

2 

10      ' 

99 

2 

10      " 

93 

3 

20      ' 

98 

3 

10      " 

94 

4 

20      ' 

'                 97 

4 

20      " 

95    1 

6 

20      ' 

96 

5 

30      " 

96 

6 

30      ' 

95 

6 

30      " 

97 

7 

30      ' 

94 

7 

30      " 

98 

8 

40      ' 

93 

8 

30      « 

99 

9 

40      ' 

92 

9 

40      " 

100 

10 

50      ' 

91 

10 

40      " 

101 

Then  the  committee  would  settle  upon  896  per  share  as 
the  price  which  would  make  possible  the  larg-  An  assumed 
est  number  of  transactions.  At  that  price  case* 
the  first  five  bidders  stand  ready  to  buy  a  total  of  eighty 
shares  ;  while  the  number  of  shares  offered  by  the  sellers 
is  also  eighty.  A  price  of  $97  would  reduce  the  demand 
to  sixty  shares,  while  a  price  of  $95  would  reduce  the 
number  of  shares  offered  to  fifty.  196  is  the  price  which 
will  equalize  demand  and  supply,  and  at  the  same  time 
allow  the  largest  number  of  purchases  to  be  made. 

§  115.  While  the  demand  for  any  commodity  will 
tend  to  vary  inversely  as  the  price  at  which  it  is  offered, 
various  commodities  differ  very  widely  in  Fluctuations  °f 
the  degree  in  which  the  demand  for  them  market  values, 
varies  as  market  prices  fluctuate.  Certain  articles, 
such  as  cotton  and  wheat,  supply  the  more  necessary 
bodily  wants.  People  buy  just  about  so  much  of  these 
goods  each  season,  without  stopping  to  inquire  whether 


192  PRINCIPLES   OF  ECONOMICS. 

prices  are  a  little  higher  or  a  little  lower.  If  the 
prices  fall  somewhat,  consumption  cannot  be  greatly 
increased ;  while  if  prices  rise  slightly,  people  will  still 
purchase  these  necessities,  and  spend  less  for  other 
things.  The  demand  for  wheat  will  not  decrease  very 
rapidly  until  "  famine  prices "  are  reached,  while  the 
consumption  of  wheat  will  not  increase  very  much  until 
a  very  low  price  is  offered.  The  result  is  that,  when  the 
supply  of  these  commodities  varies,  the  change  of  price 
required  to  produce  a  corresponding  variation  of  demand 
is  very  great.  Therefore  sharp  fluctuations  often  take 
place  in  the  prices  of  necessaries  before  the  demand  can 
be  made  equal  to  the  changed  supply.  On  the  other 
hand,  luxuries  and  articles  of  relatively  voluntary  con- 
sumption do  not  show  such  great  changes  in  price  when- 
ever the  supply  changes.  If  the  supply  of  silk  increases, 
a  slightly  lowered  price  will  stimulate  consumption,  and 
lead  to  an  increased  demand.  Similarly,  if  the  supply 
decreases,  consumption  is  quickly  checked ;  and  the 
demand  decreases  before  prices  rise  very  high. 

§  116.    Illustrating  the  equalization   of   demand  and 
supply,  we  assumed  that  the  sellers  were  able  to  hold 

back  a  portion  of  their  stocks  of  wheat,  if 
Forced  sales. 

they  considered  that  at  a  future  date  they 

would  be  able  to  secure  a  higher  price.     They  were  able, 

therefore,  to  make  the  supply  of  wheat  as  small  or  as 

large  as  they   might  find   it   for  their  interest   to   do. 

Whenever  merchants   are  selling  grain,  or  lumber,  or 

iron,  they  can  usually  hold  back  a  certain  portion  or  all 

of  their  stocks;  and  on  any  market  day  can  make  the 


MARKET    VALUE.  193 

supply  offered  at  any  given  price  larger  or  smaller.  If, 
for  instance,  there  comes  a  report  of  a  shortage  in  the 
wheat  crop,  dealers  will  probably  conclude  that  the 
visible  stocks  of  wheat  are  likely  to  decrease,  and  that 
the  supply  offered  in  the  market  in  the  near  future  will 
probably  be  smaller  than  it  is  at  the  present  time.  The 
result  will  be  a  prospect  of  higher  prices,  and  this  pros- 
pect will  induce  dealers  to  reserve  at  least  a  portion  of 
their  stocks  for  future  sales.  When  this  happens,  the 
present  supply  of  wheat  will  diminish  and  prices  will 
begin  to  rise.  In  many  cases,  however,  merchants  are 
unable  to  hold  back  any  considerable  portion  of  their 
stocks.  This  is  most  clearly  seen  in  the  case  of  perish- 
able fruits  and  vegetables.  On  a  Saturday  night  a 
merchant  may  have  to  dispose  of  his  entire  stock  at 
whatever  price  it  will  bring,  or  he  will  have  it  spoil  on 
his  hands.  Under  such  conditions  he  is  obliged  to  make 
a  forced  sale  at  any  price  that  will  be  low  enough  to 
induce  consumers  to  take  the  goods  off  the  market.1 
And  this  may  occur  in  the  case  of  other  than  perishable 
goods.  It  often  happens  that  the  supply  of  a  commodity 
is  increased  so  greatly  that  it  cannot  be  disposed  of  at 
the  former  paying  prices  within  a  reasonable  length  of 
time.  At  other  times  a  business  crisis  will  throw  men 
out  of  employment,  and  make  it  impossible  for  them  to 
buy  the  former  quantity  of  goods  at  the  old  prices. 
Here  again  the  supply  of  some  goods  becomes  excessive 
relatively  to  the  demand.     Tn  all  such  cases  the  exces- 

1  Commodities  which   arc  likely  to  become   worthless   hy   reason    of 
changes  in  style  or  fashion  are  similar  to  perishable  goods  in  this  respect. 

18 


194  PRINCIPLES   OF  ECONOMICS. 

sive  stock  has  to  be  disposed  of  finally  at  any  price 
which  will  induce  consumers  to  take  it  out  of  the 
market. 

IV.  Normal  Value. 

§  117.   Although  market  values  are  constantly  chang- 
ing, an  underlying  force  controls  all  such  fluctuations. 
Normal  value  Experience    shows  that  an  unusually   high 
and  price.       price  is  not  likely  to  be  maintained  for  a 
very  long  time,  and   that   an  exceptionally  low  price  is 
equally   unstable.      Moreover,    if   we    compare    average 
market  prices  for  a  considerable   period,  we  shall  find 
that  the  relative  values  of  different  commodities  remain 
tolerably   constant,    so    long   as  no  important   changes 
occur  in  the  character  of  the  demand  or  in  the  condi- 
tions of  production.     Some  force  sets  a   limit   to   the 
fluctuations    of   the   market,    and    restores    prices   con- 
stantly to  what  the  business  world  considers  a  normal 
level.     In  other  words,  there  is  a  certain  point  around 
which  market    prices  continually   play.     If  prices  rise 
above  this  point  or  fall  below  it,  some  force  sooner  or 
later  operates  to  restore  them  to  the  old  level.     That 
price  around  which  the  market  fluctuations  play  may 
be  called  the  normal  price  of  a  commodity  ;  and,  in  this 
way,  we  arrive  at  the  concept  of  normal  value  and  price. 
It  is  important  to  notice  that  the  normal  price  of  a 
commodity  is  not  necessarily  identical  with  the  average 
Normal  price    price.     There  is  no  reason  why  the  fluctua- 
nt necessarily  tjong   Q£   prjccg   m    one  directj0n  may  not  be, 
an  average  '  •> 

price.  during    any    particular    year    or    scries    of 

years,  much  greater  and  much  more  frequent  than  the 


NORMAL   VALUE.  195 

fluctuations  in  the  opposite  direction.  In  such  a  case 
an  average  of  the  market  prices  would  be  much  more 
or  much  less  than  the  normal  price  level. 

§  118.  We  must  next  investigate  the  nature  of  the 
force  which  determines  the  normal  point  around  which 
market  prices  play.     Commodities  are  pro- 

1  r     J  r  The  force  gov- 

duccd  by  capitalists  and  laborers  who  desire  erning normal 
to  secure  the  largest  possible  returns  for 
the  sacrifices  or  costs  incurred  in  the  work  of  produc- 
tion. In  the  modern  business  world  this  return  takes 
the  form,  as  a  rule,  of  money  secured  from  the  sale 
of  the  products  of  industry,  since  production  for  one's 
own  consumption  is  relatively  unimportant.  In  so  far 
as  they  have  the  'power  of  choice,  laborers  and  capitalists 
alike  will  endeavor  to  invest  their  labor  and  capital  in 
those  occupations  which  offer  the  largest  return  for  a 
given  amount  of  sacrifice.  Here,  then,  we  find  a  force 
that  tends  to  increase  or  restrict  the  supply  of  goods 
brought  into  the  market,  and  to  affect  the  movement 
of  prices.  If  two  commodities  that  require  the  same 
amounts  of  sacrifice  for  their  production  command 
different  values  in  the  market,  producers  will  in- 
crease the  supply  of  that  commodity  which  happens  at 
the  time  to  be  more  valuable  and  offers  the  larger 
return  for  a  given  outlay.  This  increased  supply  will 
lower  the  value  of  this  commodity  to  the  level  of  the 
other  one  representing  the  same  expenditure  of  labor 
and  capital. 

The  operation  of  this  force  which  leads  men  to  adjust 
the  supply  of  commodities  to  the  demand  may  be  clearly 


196  PRINCIPLES   OF  ECONOMICS. 

seen  if  we  imagine  a  case  in  which  a  single  producer 

labors  to  provide  for  his  own  wants.     Here  the  rnargi- 

uiustration     na*  utility   of   each  good  for  this   person's 

andexpia-      own  consumption  would  determine  the  de- 

nation. 

mand.  The  producer  would  then  simply 
make  an  estimate  of  the  sacrifices  necessary  for  the 
attainment  of  each  commodity,  and  would  expend  his 
labor  and  capital  in  the  production  of  those  articles 
which  would  yield  the  largest  surplus  of  utility  over 
cost.  In  the  modern  business  world,  with  its  complex 
labor  system  and  complicated  industrial  organization, 
the  truth  is  not  ecmally  .obvious.  But,  even  here,  the 
same  principle  must  operate.  The  competition  of  the 
market  fixes  market  prices,  and  determines  the  amount 
of  the  returns  that  the  producers  of  different  commodi- 
ties may  expect  to  receive.  The  entrepreneurs  who 
control  the  production  of  goods  constantly  estimate  the 
labor  and  capital  that  must  be  invested  in  order  to 
secure  a  given  quantity  of  each  product.  They  know 
that,  out  of  the  total  income  of  the  business,  laborers 
and  owners  of  capital  must  receive  shares  that  corres- 
pond to  the  sacrifices  incurred  in  production;  for  these 
persons,  as  well  as  the  employers,  will  endeavor  to 
secure  the  largest  possible  earnings  for  their  invest- 
ments of  labor  and  capital.  So  far  as  they  have  the 
power  of  choice,  entrepreneurs  will  regulate  the  output 
of  each  branch  of  industry  in  such  a  way  as  to  secure 
the  greatest  return  for  a  given  outlay.  Large  profits  in 
any  one  business  are  certain  to  attract  new  investments 
of   labor   and   capital    and  to    call  forth   an    increased 


NORMAL    VALUE.  197 

supply,  while  a  low  rate  of  profit  or  the  prospect  of  loss 
will  in  the  long-  run  decrease  production. 

§  119.  The  competition  of  the  market,  by  which  mer- 
chants determine  market  prices  from  day  to  day,  has 
been  called  "  commercial  competition."  To  industrial 
the  competition  of  entrepreneurs  or  invest-  competition, 
ors,  who  endeavor  to  regulate  production  according  to 
the  demand  of  the  market,  the  term  "  industrial  com- 
petition "  has  been  applied.1  It  is  important  for  us  to 
examine  the  actual  processes  by  which  this  industrial 
competition  operates.  In  case  of  the  prospect  of  large 
profits  in  any  industry,  many  employers  engaged  in  that 
branch  of  production  are  stimulated  to  enlarge  or  ex- 
tend their  existing  plants.  Then,  too,  other  capitalists 
may  be  induced  to  establish  new  enterprises.  In  a  pro- 
gressive country  there  exists  in  every  prosperous  year  a 
mass  of  accumulated  profits  that  seeks  favorable  oppor- 
tunities for  investment.  Sometimes,  also,  old  capital 
can  be  withdrawn  from  one  line  of  production,  and  in- 
vested in  another  that  promises  a  larger  return.  On  the 
other  hand,  let  us  suppose  that  the  market  value  of  a 
certain  commodity  has  fallen  to  such  an  extent  that 
producers  are  confronted  with  the  prospect  of  small 
profits  or  actual  loss.  Then  employers  will  begin  to 
run  their  factories  only  a  part  of  each  week,  or  will 
close  their  doors  and  wait  for  better  times.  Some  of 
them  may  fail,  and  thus  be  forced  out  of  business.  A 
few  may  find  it  possible  to  transfer  their  capital  to  some 
more  profitable  enterprise.     We  shall  learn  in  a  subse- 

1  See  Hartley,  Economies,  87 


198  PRINCIPLES   OF  ECONOMICS. 

quent  section  that  the  cost  of  producing  a  commodity 
is  seldom  exactly  the  same  in  any  two  establishments. 
It  follows,  therefore,  that  a  slight  fall  of  prices  would 
merely  force  out  of  business  those  employers  who  are 
producing  at  the  greatest  cost.  In  all  of  these  ways  the 
supply  of  any  commodity  is  usually  decreased  as  soon 
as  a  decline  in  the  market  value  makes  its  production 
unprofitable.  Whenever  producers  work  only  or  chiefly 
upon  orders,  the  adjustment  of  the  supply  to  the  needs 
of  the  market  is  tolerably  exact,  and  temporary  fluctua- 
tions of  market  values  are  less  likely  to  occur. 

§  120.   Just  as  the  marginal   utility  of  commodities 

determines  the  demand,  so  the  cost  of  production  is  a 

force  that  governs  the  supply  that  producers 

Analysis  of  °  ri   J  r 

cost  of  produc-  will  be  willing  to  place  in  the  market.  We 
must  now  make  a  careful  analysis  of  the 
different  elements  that  enter  into  the  cost  of  production. 
In  a  previous  chapter  (§  95)  the  process  of  production 
was  considered  from  the  point  of  view  of  an  entire  society 
or  community,  and  we  enumerated  the  sacrifices  that 
society  is  required  to  make  in  order  that  production 
may  be  carried  on.  Thus  we  arrived  at  the  concept  of 
the  social  cost  of  production.  But  in  studying  the 
problem  of  normal  value,  it  is  necessary  to  adopt  an- 
other point  of  view,  aud  to  ascertain  what  sacrifices  are 
incurred  by  individual  producers  in  their  efforts  to 
supply  the  market.  It  is  the  cost  of  production  to  indi- 
vidual investors,  or  the  producers'  cost,  that  governs 
normal  values  ;  and  it  is  this  cost  that  must  now  be 
analyzed  into  its  constituent  parts. 


NORMAL   VALUE.  199 

In  order  that  production  may  be  carried  on,  the 
materials  offered  by  nature  must  be  appropriated,  and 
natural  forces  must  be  controlled  and  applied.  Natural  agents 
But  all  these   elements  are  the  bounty  of  not  an jeleme,nt 

J  in  producers 

nature,  and  they  are  not  factors  influencing  cost. 
the  cost  incurred  by  individual  producers.  If  any  of 
these  natural  agents  are  monopolized,  then  the  owners 
of  the  monopoly  privileges  may  exact  payments  for 
their  use,  and  producers  must  incur  this  expense  be- 
fore industries  can  be  established.  But  in  such  a  case, 
we  are  dealing  with  an  element  of  monopoly  value  ; 
whereas  the  normal  values  which  we  are  studying 
are  determined  by  competition.  The  entire  problem  of 
monopoly  values  will  be  discussed  in  a  subsequent  chap- 
ter. For  the  present  we  are  assuming  the  existence  of 
competition  ;  and,  in  the  absence  of  monopoly  privileges, 
it  is  evident  that  natural  agents  do  not  form  an  element 
in  producers'  costs.  Such  costs  are  not  incurred  until 
producers  commence  to  apply  their  labor  and  capital 
in  the  utilization  of  the  materials  and  forces  of  nature. 

The  first  element  in  producers'  cost  is  the  labor  ex- 
pended in  production.  This  may  be  exerted  indirectly 
in  the  manufacture  of  the  capital  needed  for  Laboraneie- 
the  prosecution  of  the  productive  process,  mentincost. 
or  directly  in  the  application  of  capital  and  natural 
agents  to  the  work  in  hand.  In  both  cases  the  amount 
of  the  costs  incurred  will  depend  upon  :  (a)  the  charac- 
ter and  intensity  of  the  labor,  whether  intellectual  or 
physical,  skilled  or  unskilled ;  and  (b)  the  length  of 
time  during  which  the  exertion  must  continue.     Some- 


200  PRINCIPLES  OF  ECONOMICS. 

times  certain  other  circumstances  affect  the  situation. 
Work  that  is  held  in  low  social  esteem  may  be  consid- 
ered to  involve  an  additional  element  of  sacrifice  on  the 
part  of  the  laborer.  The  same  is  true  of  occupations 
that  involve  considerable  risk  of  failure  or  even  of  per- 
sonal injury. 

The  second  element  in  producers'  cost  is  involved  in 

the  expenditure  of  capital.     Buildings   and  machinery 

Abstinence       mus^  continually  be  repaired,  and  materials 

the  second       and  fuel  must  be  replaced.     We  have  seen 

element. 

that  the  production  of  all  the  capital  thus 
consumed  requires  labor,  and  have  assigned  a  place  to 
this  element  of  cost  in  the  previous  paragraph.  But,  as 
has  been  explained  elsewhere  (§  84),  the  formation  and 
constant  renewal  of  capital  require  abstinence,  or  wait- 
ing, as  well  as  labor.  This  abstinence,  or  waiting,  con- 
stitutes an  independent  element  of  sacrifice,  and  is  a 
second  factor  in  determining  producers'  costs.  The 
reader  should  be  reminded  at  this  point  that,  while 
every  unit  of  capital  is  the  result  of  an  abstinence  from 
present  enjoyments  and  a  choice  of  future  goods  instead 
of  present,  the  various  portions  of  our  actual  supply  of 
capital  represent  very  different  amounts  of  sacrifice  on 
the  part  of  investors  (§  84).  Millionaires  may  accumu- 
late large  masses  of  capital  far  more  easily  than  persons 
of  moderate  means  can  save  small  amounts,  and  men 
who  are  anxious  to  provide  for  the  future  may  practise 
saving  with  much  more  ease  than  people  of  a  less  prov- 
ident disposition.  But  the  modern  business  world 
requires   an  enormous   mass  of   capital,  and  its    needs 


NORMAL   VALUE.  201 

cannot  be  supplied  by  these  accumulations  that  repre- 
sent little  actual  sacrifice.  There  is  a  large  class  of 
what  may  be  called  marginal  investors,  whose  savings 
are  needed  for  the  establishment  of  industrial  enter- 
prises, for  whom  the  formation  of  capital  entails  very 
real  acts  of  sacrifice.  So  long  as  this  continues  to  be 
the  case,  every  unit  of  capital  will  represent  to  the 
minds  of  producers  a  degree  of  abstinence  that  corre- 
sponds to  the  sacrifices  experienced  by  the  marginal 
investors ;  and  abstinence  will  form  a  necessary  element 
of  producers'  cost. 

It  must  be  understood  that  the  cost  of  producing  a 
commodity   includes    more    than    the    expenditure    of 
labor  and  capital  on  the  farm,  in  the  mine, 
or  at    the    factory.     Tools    and    materials  capital  re- 
must   often    be    transported    from    distant  Jl^ired  *°r 

1  transporting: 

places    to    the     establishment    where     the  products  and 

cf  lectin (r  s&lcs 

direct  work  of  production  is  carried  on. 
Then  the  completed  product  must  be  carried  to  the 
markets  where  the  consumers  are  to  be  found.  All 
this  work  of  transportation  calls  for  heavy  outlays  of 
labor  and  capital.  Moreover,  it  is  frequently  necessary 
to  advertise  extensively  and  to  employ  travelling  sales- 
men in  order  to  dispose  of  the  commodities  produced. 
In  many  cases  this  work  adds  greatly  to  the  producers' 
expenditure  of  labor  and  capital. 

Some  economists  have  included  risk  as  an  independ- 
ent element  in  producers'  cost,1  but  an  accurate  analysis 
does    not  justify    such  a   view.     Risk    undoubtedly  at- 
1  See  Cairnes,  Leading  Principles  of  Political  Economy,  75. 


202  PRINCIPLES   OF  ECONOMICS. 

tends  the  work  of  production,  but  it  cannot  be  sepa- 
rated from  the  labor  and  abstinence  that  constitute  the 
Risk  is  not      two   elements   that   determine   cost.     First 
a  separate  eie-  je^-   ug   consi(jer   the   investment   of    labor. 

ment  in  pro- 
ducers'cost.  We  hare  seen  that,  if  any  particular  indus- 
try entails  unusual  risks  of  failure  or  of  personal  in- 
jury, workmen  will  consider  that  a  given  amount  of 
labor  in  this  occupation  represents  a  greater  sacrifice 
than  an  equivalent  quantity  of  labor  of  a  different 
kind.  This  element  of  risk  is  inseparably  connected 
with  laborers'  estimates  of  the  sacrifices  involved  in 
different  branches  of  employment.  The  same  thing 
is  true  of  the  investment  of  capital.  In  devoting  their 
property  to  the  establishment  of  industrial  enterprises, 
capitalists  are  obliged  to  assume  two  classes  of  risks. 
There  may  be  danger,  in  the  first  place,  of  the  destruc- 
tion of  the  invested  capital  by  fire,  explosion,  or  ship- 
wreck. The  result  of  such  losses  is  simply  to  increase 
the  amount  of  capital  required  to  produce  the  goods 
which  the  market  demands,  and  to  make  a  greater 
amount  of  labor  and  abstinence  necessary  for  the 
production  of  a  given  quantity  of  product.  Investors 
are  able,  by  means  of  the  device  of  insurance,  to  dis- 
tribute actual  losses  over  a  large  number  of  insurers; 
but  this  does  not  alter  the  nature  or  effect  of  these 
risks,  which  are  inseparable  from  an  investment  of 
capital.  In  the  second  place,  the  investor's  prospect 
of  finding  a  remunerative  sale  for  his  product  may  be 
rendered  unusually  precarious  by  the  character  of  the 
market   or   the   difficulty   of    forecasting  the   probable 


NORMAL   VALUE.  203 

demand.  In  such  cases  labor  and  capital  arc  mis- 
applied in  the  production  of  commodities  that  are  not 
in  demand,  and  such  a  waste  of  resources  merely  adds 
to  the  cost  of  supplying  the  goods  that  consumers  are 
desirous  of  purchasing.  Thus  risks  of  this  class  merely 
increase  the  cost  of  producing  the  articles  that  are 
demanded  in  markets  that  prove  to  be  of  such  a  pre- 
carious nature.  In  all  cases  risk  serves  merely  to 
increase  the  labor  and  abstinence  that  are  necessary 
for  the  work  of  production,  and  it  is  impossible  to  find 
here  a  third  and  independent  element  of  producers' 
cost. 

§  121.  The  problem  of  normal  value  is  complicated 
by  the  <  fact  that  the  costs  of  production  are  seldom 
exactly  the  same  in  any  two  establish-  Different  costs 
ments  of  the  same  class.  Now  does  nor-  of  vr^nctxon. 
mal  value  depend  upon  the  highest,  the  lowest,  or  the 
average  cost  ?  The  answer  to  this  question  may  be 
first  stated,  and  will  then  require  further  explanations. 
Normal  values  vary  according  to  the  cost  of  produc- 
ing the  most  costly  portions  of  the  necessary  or  cus- 
tomary supply.  If  in  any  market  the  consumers  have 
been  accustomed  to  purchase  about  1,000,000  bushels 
of  wheat,  and  if  they  require  about  that  quantity,  the 
value  of  wheat  will  have  to  be  high  enough  to  make 
it  profitable  for  producers  to  cultivate  the  poorest  land 
that  has  to  be  utilized  in  order  to  raise  1,000,000 
bushels.  If  the  value  should  fall  so  low  as  to  leave 
an  inadequate  return  for  the  labor  and  abstinence 
expended  by  the  cultivators  of  this  poorest  land,  these 


204  PRINCIPLES   OF  ECONOMICS. 

producers  would  cease  to  raise  wheat ;  and  the  supply 
offered  in  the  market  would  become  less  than  1,000,000 
bushels.  Competition  among  the  consumers,  who  are 
assumed  to  need  1,000,000  bushels,  would  straightway 
raise  the  value  of  wheat  sufficiently  to  make  it  profit- 
able to  cultivate  these  poorest  lands.  For  this  reason 
the  value  of  a  commodity  at  any  given  time  must  be 
sufficient  to  compensate  those  laborers  and  capitalists 
who  produce  the  most  costly  portion  of  the  necessary 
or  customary  supply.  This  portion  may  be  called  the 
marginal  unit  of  the  supply,  and  we  may  speak  of 
marginal  producers. 

The  difference  between  the  highest  and  the  lowest 

cost  will  be  greater  in  some  industries  than  in  others. 

Extent  of        ^n  agriculture  or  in  mining,  the  amount  of 

possible  product  secured  from  any  tract  of  land  can- 

differences  .... 

in  cost  of        not,  at  any  given  time,  be  increased  very 

production.  greatly  before  the  point  of  diminishing  re- 
turns is  reached  (§  98).  When  this  condition  is  en- 
countered, it  is  more  profitable  to  invest  additional 
capital  upon  other  land.  The  result  is  that,  if  the  need 
for  agricultural  produce  or  for  minerals  is  so  great  that 
the  best  lands  or  the  richest  mines  cannot  supply  all 
that  the  consumers  require,  then  inferior  lands  and 
poorer  mines  must  be  utilized.  If  the  needs  of  con- 
sumers increase  very  greatly,  il  is  possible  for  a  great 
many  different  grades  of  land  or  mines  to  be  used  in 
production;  and  there  may  be  very  great  differences 
between  the  cosl  of  production  upon  the  best  land  and 
that  incurred  upon  the  poorest.     On  the  other  hand,  in 


NORMAL  VALUE.  205 

manufactures  and  commerce  larger  amounts  of  capital 
can  be  invested  before  the  point  of  diminishing  returns 
is  reached.  The  result  is  that  the  stock  of  goods  pro- 
duced upon  a  given  piece  of  land  can  be  greatly 
increased  if  market  conditions  make  it  profitable  for 
producers  to  adopt  such  a  course.  For  this  reason  the 
more  efficient  manufacturing  establishments,  which  pro- 
duce at  the  lowest  cost,  are  constantly  increasing  their 
output,  and  are  driving  the  less  productive  factories  to 
the  wall.  There  is,  therefore,  less  room  for  a  great 
difference  between  the  costs  of  production  in  the  best 
factories  and  in  the  poorest  that  manage  to  continue  in 
operation.  If  the  inferior  establishment  produces  at  a 
very  much  greater  cost,  its  owner  is  likely  to  find  that 
better  equipped  and  better  operated  factories  will  supply 
the  entire  demand  at  prices  that  make  it  impossible  for 
him  to  continue  in  business.  For  this  reason  some 
economists  have  thought  that  manufacturing  industry 
is  governed  by  a  different  law  from  that  which  prevails 
in  agriculture  and  mining,  and  that  the  lowest  cost  of 
production  controls  the  normal  value  of  manufactured 
products.  If  a  long  period  of  time  is  considered,  it  is 
undoubtedly  true  that  the  most  efficient  factories  set  the 
standard  to  which  others  must  conform.  But  it  is  none 
the  less  true  that,  at  any  given  point  of  time,  normal 
value  must  be  governed  by  the  cost  of  production  in  the 
least  efficient  establishments  that  are  able  to  maintain 
themselves  in  business. 

§  122.    It    has    been    shown    that   market    values    de- 
pend primarily  upon  the  marginal  utility  which  a  given 


206  PRINCIPLES   OF  ECONOMICS. 

quantity  of   goods  has   for  consumers,  and   that  they 

constantly  fluctuate  according  to  temporary  changes  in 

normal  demand  or  supply.     It  is  now  evident  that 

values  market  fluctuations  are  limited,  and  normal 

depend  . 

upon  a  values    are    determined    by    the   operation 

opposing*       °f  ^ie  cost  °f  Production.     Normal   value, 
forces.  therefore,    depends    upon    a    balancing    of 

marginal  utility,  the  force  that  governs  demand,  against 
the  cost  of  production,  the  force  that  controls  supply ; 
and  it  may  be  said  that  a  normal  value  is  one  that 
will  tend  to  make  production  equal  to  consumption. 
Value,  says  Mr.  Marshall,  "  rests,  like  the  keystone 
of  an  arch,  balanced  in  equilibrium  between  the  con- 
tending pressures  of  its  two  opposing  sides.  The  forces 
of  demand  press  on  the  one  side,  those  of  supply  on  the 
other." 

From  the  point  of  view  of  society  it  is  undoubtedly 
advantageous  to  have  the  values  of  commodities  propor- 
tionate  to  the  outlays  of  labor  and  capital 
an  adjustment  necessary  to  produce  them.     If  two  articles 
costs  of  represent  the  same  cost  of  production  while 

production.  Qne  Qf  ^hem  has  a  smaller  value  in  the  mar- 
ket, it  follows  that  society  is  securing  a  product  of 
smaller  marginal  utility  from  the  labor  and  capital 
invested  in  producing  the  commodity  that  possesses 
the  lower  value.  Under  such  circumstances  a  product 
of  greater  utility  could  be  realized  by  withdrawing  some 
capital  from  the  less  profitable  industry  and  investing  it 
elsewhere. 

The  student  must  be  reminded  that,  in  this  study  of 


NORMAL    VALUE.  207 

the  theory  of  value,  we  have  been  supposing  that  buyers 
and  sellers,  consumers  and  producers,  are  conducting  their 
business  affairs  with  a  fair  knowledge  of  the 

Competition 

demands  of  the  market  and  the  conditions  is  often 
of  production.  We  have  assumed,  further-  mpe 
more,  that  absolute  freedom  of  competition  has  prevailed 
in  all  these  transactions.  It  is  needless  to  say  that  these 
assumed  conditions  are  seldom,  if  ever,  perfectly  realized 
in  actual  business.  Buyers  and  sellers  usually  have  im- 
perfect knowledge  of  market  conditions,  and  producers 
are  not  often  able  to  act  with  perfect  foresight  and  com- 
plete freedom  in  the  choice  of  fields  for  investment. 
Under  such  circumstances  the  determination  of  normal 
values  cannot  take  place  with  anything  like  the  preci- 
sion for  which  our  theory  calls,  and  actual  prices  must 
often  be  the  result  of  haphazard  or  arbitrary  methods  of 
procedure. 

Nevertheless  we  may  affirm  that  our  theory  of  normal 
value  possesses  the  highest  theoretical  and  practical 
importance.     It  is  based  upon   a  study  of 

-,     ■%    •  c  i-i  .  Importance 

underlying  iorces  which  no  economist  or  of  theory 
practical  man  of  business  can  afford  to  neg-  of  value* 
lect.  Every  entrepreneur,  although  his  foresight  may  be 
imperfect  and  his  freedom  of  choice  limited,  is  obliged 
to  study  most  carefully  and  searchingly  the  probable 
demand  for  his  products ;  while  the  closest  attention 
must  be  devoted  to  every  circumstance  that  affects  the 
cost  of  production.  It  follows  that,  in  spite  of  all  hin- 
drances to  their  full  operation,  the  marginal  utility  and 
cost  of  production  of  a  commodity  are  real  forces  which 


208  PRINCIPLES   OF  ECONOMICS. 

constantly  exercise  a  controlling  influence  upon  the  de- 
termination of  values.  Reason  and  experience  furnish 
ample  confirmation  of  this  conclusion. 

The  practical   operation  of   these   great  forces   that 
govern    supply    and    demand    may   be    advantageously 
iuustrative      studied    by    considering   certain    important 
facts.  facts  in  the  history  of  the  copper  and  the 

steel  industries.  Since  1890  the  annual  production  of 
copper  has  risen  from  271,000  to  more  than  412,000 
tons,  an  increase  of  more  than  fifty  per  cent.  Yet  in 
the  face  of  this  larger  output,  the  price  of  copper  was 
rather  higher  at  the  opening  of  1899  than  it  was  nine 
years  earlier.  This  is  a  most  interesting  phenomenon, 
and  its  explanation  is  to  be  found  in  the  fact  that 
the  increased  demand  for  copper  for  use  in  our  growing 
electrical  industries  has  kept  up  the  marginal  utility  of 
a  greatly  increased  supply  sufficiently  to  prevent  any 
fall  in  value.  In  the  steel  industry,  the  operation  of 
the  cost  of  production  may  be  observed.  During  tho 
last  forty  years  improved  processes  of  manufacture  have 
greatly  reduced  the  expenditure  of  capital  and  labor 
required  for  the  conversion  of  pig  iron  into  steel,  and 
this  change  has  caused  a  corresponding  movement  in 
the  values  of  the  two  commodities.  In  1860  a  ton  of 
pig  iron  was  worth  from  twenty  to  thirty  dollars,  and 
steel  bars  sold  at  prices  that  ranged  from  two  hundred 
and  fifty  to  three  hundred  dollars  per  ton.  In  189G 
pig  iron  suitable  for  the  manufacture  of  Bessemer  steel 
sold  for  about  twelve  dollars  per  ton,  and  steel  billets 
could  be  bought  for  about  eighteen  dollars.     In  1860, 


NORMAL    VALUE.  209 

therefore,  the  value  of  steel  was  ten  or  twelve  times  as 
great  as  that  of  the  material  out  of  which  it  was  made. 
Since  that  time  a  decreased  cost  of  production  has 
cheapened  steel  so  greatly  that  its  value  is  but  fifty  per 
cent  more  than  that  of  pig  iron. 

V.    Exceptions  to  the  Theory  of  Normal  Value. 

§  123.  It  is  now  necessary  to  consider  a  number 
of  important  cases  in  which  values  do  not  conform  to 
the  laws  which  have  just  been  explained,  custom  and 
Custom  often  tends  to  deter  producers  or  values- 
consumers  from  insisting  upon  exact  competitive  prices. 
In  retail  trade  particularly  this  influence  is  very  strong. 
Personal  relations  existing  between  buyers  and  sellers 
frequently  prevent  competition  from  fixing  values  at  the 
normal  point. 

§  124.  Especial  importance  must  be  attached  to  a 
second  class  of  exceptions.  Our  theory  of  value  pre- 
supposes the  existence  of  competition,  and  Faiiures0f 
assumes  that  producers  have  a  practical  competition, 
freedom  of  choice  in  the  investment  of  their  labor  and 
capital.  These  conditions  are  often  enough  not  ful- 
filled, especially  in  the  case  of  the  laborers.  Skilled 
laborers  are  restricted  in  their  choice  of  occupations  to 
the  trades  to  which  they  have  been  trained.  The  sup- 
ply of  such  operatives  in  particular  employments  may 
become  excessive,  and  competition  between  the  laborers 
may  compel  men  to  accept  a  smaller  remuneration  than 
equivalent  sacrifices  would  command  in  another  trade. 
Among  unskilled  workmen  nothing  is  commoner  than 

14 


210  PRINCIPLES  OF  ECONOMICS. 

a  lack  of  perfect  freedom  in  selecting  occupations. 
Poverty,  which  limits  freedom  of  movement  in  search 
of  the  best  opportunities,  ignorance  of  the  localities 
where  better  conditions  may  be  found,  and  the  concen- 
tration of  large  masses  of  unskilled  laborers  in  great 
centres  of  population,  are  the  usual  causes  of  this 
absence  of  freedom  of  choice.  In  all  such  cases  there 
may  arise,  and  probably  will  arise,  a  disproportion 
between  the  remuneration  received  by  the  workman 
and  the  exertions  that  he  is  compelled  to  undergo. 
Thus  it  happens  that  even  the  most  disagreeable  forms 
of  labor  may  command  the  lowest  rate  of  return. 

The  existence  of  such  conditions  affects  the  values 
at  which  commodities  exchange.  Normal  value  cannot 
Such  failures  De  proportioned  exactly  to  the  cost  of  pro- 
affect  value,  duction  unless  producers  are  able  to  insist 
upon  receiving  remunerations  that  are  proportionate  to 
the  sacrifices  incurred.  When  the  men  who  produce 
any  commodity  are  compelled,  by  the  absence  of  any 
practical  alternative,  to  accept  less  than  equivalent 
exertions  secure  in  other  occupations,  the  article  in 
question  may  exchange  for  less  than  it  would  otherwise 
have  to  command  in  order  to  insure  a  continuance  of 
the  supply.  In  all  such  cases  we  have  a  failure  of  per- 
fect competition,  and  we  are  compelled  to  recognize 
that  an  arbitrary  and  anomalous  element  has  entered 
into  the  determination  of  values. 

§  125.  Taxes  arc  often  the  cause  of  a  third  class  of 
exceptions.  If  taxation  affected  all  industries  equally, 
in  such  a  manner,  for  instance,  that  live  per  cent  was 


NORMAL  VALUE.  211 

added  to  the  cost  of  placing  each  unit  of  product  in 
the  market,  values  would  not  be  affected  in  the  least 
by  such  a  burden.     But  taxes  are  not  levied 

*  Taxes  and 

in  any  such  way,  and  they  often  affect  the  the  value  of 
rates  at  which  commodities  exchange.  When  comm 
taxes  are  imposed  upon  the  production  of  a  few  com- 
modities, as  upon  tobacco,  whiskey,  and  patent  medicines 
in  the  United  States,  the  effect  is  to  increase  the  out- 
lays that  must  be  incurred  by  producers  of  these  arti- 
cles, and  to  raise  the  prices  above  the  normal  point 
fixed  by  the  actual  costs  of  production.  This  result 
must  always  follow  when  taxes  fall  unequally  upon  the 
production  of  commodities,  or  when  they  are  levied 
exclusively  upon  certain  articles. 

§  126.  Producers  are  obliged  under  modern  business 
conditions  to  produce  commodities  for  sale,  at  a  distant 
season,  to  customers  of  whom  they  know  Mistakes  in 
very  little.  It  is  very  easy  for  such  pro-  Production' 
ducers  to  make  mistakes,  and  to  supply  the  market  with 
the  wrong  kind  or  the  wrong  amount  of  goods.  Further- 
more, even  if  each  business  man  had  an  exact  knowl- 
edge of  the  probable  future  demands  of  his  customers,  it 
would  be  impossible  for  him  to  know  just  what  supplies 
of  goods  competing  merchants  would  be  likely  to  bring 
to  market.  In  this  respect,  producers  are  said  to  work 
"  at  cross  purposes,"  and  production  is  said  to  be  "  plan- 
less." Whenever  mistakes  are  made  by  those  who  supply 
commodities  to  distant  markets,  there  is  a  disturbance 
of  the  normal  relations  of  demand  and  supply ;  and 
the   supply   of    commodities   may    be    either   excessive 


212  PRINCIPLES   OF  ECONOMICS. 

or  deficient.     In  such  cases  prices  will  fluctuate  tempo- 
rarily, and  will  not  correspond  to  the  cost  of  production. 
§  127.    The   investment   of   vast    amounts    of    fixed 
capital  in  modern  industrial  enterprises  has  introduced 
into  business  a  new  cause  of  disturbance  of 

The  effect  of 

large  fixed  prices.  A  large  fixed  capital  usually  is  a 
specialized  capital ;  and  is  an  investment 
that  cannot,  without  great  or  even  total  loss,  be  with- 
drawn from  the  particular  line  of  business  to  which  it 
is  expressly  adapted.  Consequently,  whenever  prices 
fall  below  a  figure  which  will  pay  all  the  costs  of 
production  and  leave  a  fair  profit,  the  managers  of  such 
large  specialized  capitals  find  themselves  in  a  peculiar 
position.  They  find  it  impossible  to  go  out  of  the 
business  without  incurring  enormous  loss.  At  the  same 
time  it  is  difficult  to  curtail  production  without  incur- 
ring an  almost  equal  loss,  a  fact  which  requires  further 
explanation.  Specialized  capital  in  the  form  of  buildings 
and  costly  machinery  requires  constant  attention  and 
renewal.  Oftentimes  machinery  depreciates  very  rapidly 
when  it  is  allowed  to  remain  idle.  The  expenses  for 
interest  and  replacement  of  fixed  capital  continue  about 
the  same  whether  an  establishment  does  a  large  business 
or  remains  idle.  Finally,  the  salaries  of  the  most  valu- 
able, and  therefore  the  most  highly  paid,  employees  may 
also  be  nearly  the  same,  since  trained  superintendents 
and  highly  skilled  mechanics  are  not  always  discharged 
even  if  business  is  temporarily  suspended.  The  princi- 
pal "variable  expenses,"  which  will  depend  upon  the 
amount  of  the  product  turned  out,  are  the  expenses  for 


NORMAL    VALUE.  213 

the  less  valuable  kinds  of  labor  and  the  expenses  for 
materials.  The  result  is  that  when  prices  fall  below  a 
point  at  which  they  yield  a  fair  profit  to  the  producer, 
the  managers  of  very  large  establishments  will  not 
promptly  reduce  the  product  which  they  turn  out.  They 
know  that  the  fixed  expenses  of  their  establishments 
will  not  be  greatly  decreased  by  running  for  shorter 
hours  or  by  temporarily  suspending  production.  Each 
manager  will  be  likely  to  calculate  that  if  he  can  sell 
his  product  for  anything  more  than  enough  to  cover 
the  cost  of  materials  and  of  common  labor,  he  will 
have  just  so  much  toward  paying  the  fixed  charges.  If, 
on  the  other  hand,  he  refuses  to  produce  at  the  lower 
prices,  he  will  not  be  earning  any  part  of  the  fixed 
expenses.  Now,  if  such  producers  form  a  combination^ 
it  is  easier  for  them  to  agree  to  stop  producing  any 
further  stock  of  goods  until  prices  rise.  But,  without 
such  an  agreement,  each  producer  will  assume  that  the 
others  are  going  to  continue  production,  and  that  he 
cannot  appreciably  diminish  the  future  supply  of  the 
commodity  by  decreasing  his  own  output.  The  result 
is  that,  wherever  large  plants  exist,  a  fall  of  prices  will 
not  promptly  check  the  output  of  commodities.  Each 
producer  may  endeavor  to  secure  something  towards 
paying  his  fixed  expenses,  even  if  he  is  obliged  to  sell 
at  a  price  which  little  more  than  covers  the  cost  for 
materials  and  common  labor.  Prices  may  remain  below 
the  full  cost  of  production  for  a  long  time  whenever  such 
a  condition  of  affairs  exists.  Professor  Hadley 1  has 
1  See  "Railroad  Transportation,"  7i>. 


214  PRINCIPLES   OF  ECONOMICS. 

called  attention  to  a  striking  illustration  of  this  fact. 
Between  1870  and  1873  an  exceptionally  high  price  for 
pig  iron  attracted  a  great  deal  of  capital  into  that 
industry,  and  served  to  increase  the  annual  product 
from  1,900,000  tons  to  2,868,000  tons.  Then  followed 
a  rapid  fall  in  the  price  of  pig  iron  from  fifty-three 
dollars  to  twenty-four  dollars,  and  finally  to  seventeen 
dollars.  But  the  immense  amount  of  new  capital  that 
had  been  specialized  in  the  form  of  iron  furnaces  could 
not  be  as  quickly  withdrawn.  Production  remained 
about  as  large  as  before,  and  for  several  years  manufac- 
turers were  glad  to  produce  millions  of  tons  of  iron  for 
anything  more  than  enough  to  pay  for  materials  and 
common  wages.  Only  after  the  weaker  establishments 
had  been  bankrupted  and  forced  out  of  business,  did 
production  become  adjusted  to  the  normal  demands  of 
the  market.  It  will  be  noticed  that  in  this  instance  the 
influence  of  the  cost  of  production  finally  operated  to 
restrict  the  supply,  but  that  several  years  were  required 
to  produce  this  result.  Prices  were  restored  to  a  profit- 
able level  by  a  decrease  in  supply  caused  by  the  final 
bankruptcy  of  the  weaker  producers.  It  is  possible  that 
the  policy  pursued  by  managers  in  such  a  case  as  this 
is  really  a  short-sighted  one.  Longer  experience  may 
make  it  evident  that,  in  the  end,  it  will  be  more  profit- 
able for  all  concerned  to  restrict  production  when  prices 
fall  below  a  normal  point,  and  to  incur  the  expenses 
entailed  by  an  idle  plant.  Such  a  policy  would  make  it 
possible  for  prices  to  recover  sooner,  and  this  fact  might 
compensate  for  any  losses  incurred  in  the  item  of  fixed 


NORMAL   VALUE.  215 

expenses.  Professor  Marshall  thinks  that  trade  moral- 
ity is  inclined  to  condemn  a  man  who  "spoils  a  market" 
by  continuing  to  produce  for  any  price  that  will  barely 
cover  the  expenses  for  materials  and  common  labor. 

§  128.  We  must  consider  another  case  in  which  it  is 
difficult  to  trace  the  relation  between  value  and  costs. 
This  occurs  in  its  simplest  form  when  an  Products  ^ 
industry  has  one  chief  product  upon  which  by-Pro<*ucts. 
efforts  are  mainly  concentrated,  but  also  turns  out  a  by- 
product. Thus  cattle  may  be  raised  for  the  purpose  of 
securing  beef  ;  but  hides,  horns,  hoofs,  and  bones  may 
be  secured  as  by-products.  Similarly,  wheat  is  a  main 
product,  and  straw  a  by-product ;  or  illuminating  gas  is 
a  principal  product,  and  coke  a  by-product.  Under  such 
circumstances  how  will  the  values  of  the  main  products 
and  of  the  by-products  be  adjusted  ?  The  general  prin- 
ciple is  that  the  combined  value  of  the  main  product 
and  the  by-products  will  approximate  the  total  costs  of 
carrying  on  the  business.  Now,  producers  will  endeavor 
to  regulate  the  production  of  joint  products  in  such  a 
way  that  the  largest  total  return  can  be  secured  from 
the  sale  of  all  the  products.  Usually  this  can  be  done 
by  producing  all  the  principal  product  that  can  be  sold 
at  good  prices,  and  then  selling  the  by-products  at  any 
prices  that  will  induce  consumers  to  take  them  out  of 
the  market.  If  the  price  of  the  principal  product  rises, 
production  will  be  increased,  larger  stocks  of  by-products 
will  be  secured,  and  their  price  will  usually  have  to  be 
lowered  in  order  to  dispose  of  them.  It  sometimes 
happens  that  changed  market  conditions  raise  the  price 


216  PRINCIPLES  OF  ECONOMICS. 

of  a  former  by-product  so  as  to  make  it  worth  while  to 
regulate  production  according  to  the  price  of  that  prod- 
uct. In  all  cases,  however,  the  total  prices  of  all 
products  will  conform  to  the  total  costs  of  the  business ; 
while  the  relative  prices  of  the  different  products  will 
be  determined  by  the  relative  demand  of  the  market 
for  each  commodity,  in  the  quantities  furnished  by  the 
business. 

§  129.   In  a  large  business  which  has  many  different 

branches  it  is  often  difficult  to  determine  exactly  what 

are   the   expenses   of   each    branch.     It    is 

Difficulty  of  l 

determining  especially  difficult  to  determine  the  exact 
proportion  of  the  fixed  expenses  chargeable 
to  each  branch,  and  to  each  different  product.  Some- 
times this  is  done  in  quite  an  arbitrary  manner.  Occa- 
sionally some  one  commodity  is  used  as  a  means  of 
advertising  others.  It  may  be  sold  for  less  than  its 
entire  cost,  in  the  hope  that  new  customers  may  be 
attracted,  and  the  sale  of  other  goods  may  be  increased. 
It  is  understood  that  grocers  in  the  United  States  have 
often  used  sugar  in  this  manner. 

§  130.    Whenever  the  supply  of  a  commodity  comes 
under  the  control  of  a  single  person  or  group  of  persons, 
Monopoly        competition  among  the  sellers  is  no  longer 
value.  active  in  determining  prices.     Such  a  power 

to  control  supply  is  called  a  monopoly,  and  we  shall  find 
in  a  subsequent  chapter  that  monopoly  values  and  prices 
differ  in  important  respects  from  competitive  values  and 
prices. 


LITERATURE.  217 


LITERATURE   ON   CHAPTER  VII. 

General  References:  Andrews,  Institutes  of  Economics,  83- 
117;  Ely,  Outlines  of  Economics,  111-139;  Gidk,  Political 
Economy,  169-182;  Hadley,  Economics,  6-1-96;  Lavei.eye. 
Elements  of  Political  Economy,  180-188;  Macvane,  Political 
Economy,  17-34,  86-119;  Marshall,  Principles  of  Economics, 
401-565;  Roscher,  Political  Economy,  I.  289-339;  Walker, 
Political  Economy,  78-110. 

Special  References  :  Mill,  Principles  of  Political  Economy, 
Bk.  III.,  Chaps.  1-6  ;  Cairnes,  Eeading  Principles  of  Political 
Economy,  11-146.  These  authors  present  in  best  form  the  older 
theories  of  value.  Smart,  Introduction  to  the  Theory  of  Value ; 
Bohm-Bawerk,  Positive  Theory  of  Capital,  129-234;  Wieser, 
Natural  Value,  3-113 ;  Jevons,  Theory  of  Political  Economy, 
37-166  ;  Clark,  Philosophy  of  Wealth,  70-106.  These  writers 
present  the  newer  theories  of  value. 


218  PRINCIPLES  OF  ECONOMICS. 


CHAPTER    VIII. 

MONEY. 

I.     Development  of  Metallic  Money. 

§  131.  The  earliest  exchanges  were  effected  by  barter. 
Each  man  exchanged  goods  which  had  little  utility  to 
him  for  other  goods  which  had  more.  In 
this  direct  exchange  of  one  commodity  for 
another  there  are  serious  disadvantages.  A  horse  can- 
not be  bartered  for  a  cow  unless  each  party  to  the  ex- 
change desires  to  obtain  exactly  the  commodity  offered 
by  the  other.  Very  often  such  a  coincidence  of  desires 
does  not  exist.  In  the  second  place,  many  commodities 
are  not  divisible  into  fractional  parts.  Three  hats  may 
be  exchanged  for  a  coat,  but  it  is  impossible  to  secure 
one  hat  by  bartering  a  third  of  a  coat  for  it.  Again,  if 
one  hundred  different  commodities  are  continually  bar- 
tered for  each  other,  they  may  exchange  in  any  one  of 
4,950  combinations.  Traders  must  know  all  of  these 
4,950  market  values  if  they  would  avoid  being  cheated. 

§  132.    Gradually  men  devised  a  method  of  avoiding 

these  difficulties.    They  saw  that,  while  some  commodities 

The  origin      were  demanded  only  upon  certain  occasions 

of  money.       or  un(jer  certain  conditions,  other  goods  wen 

almost    invariably   in  demand,  and  were  acceptable  to 

nearly  all  persons.     Among  hunting  tribes  skins  of  ani- 


DEVELOPMENT  OF  MONEY.  210 

mals  were  always  in  demand,  since  they  were  the  princi- 
pal product  of  labor,  were  durable,  and  useful  for  many 
purposes.  Among  pastoral  peoples  cattle  and  sheep 
possessed  this  quality,  since  they  were  useful  in  very- 
many  ways,  and  any  person  could  without  trouble  add 
them  to  his  herds.  So,  among  the  American  Indians, 
strings  of  wampum  were  objects  of.  general  desirability, 
since  they  served  to  gratify  a  universal  desire  for  orna- 
ment. When  it  was  found  that  furs,  or  cattle,  or  wam- 
pum, or  any  other  commodity  was  always  in  demand,  a 
way  was  opened  by  which  the  difficulties  of  barter  could 
be  avoided.  If  a  man  possessed  corn  and  desired  to  ex- 
change it  for  clothing,  he  need  no  longer  find  another 
person  who  desired  to  exchange  precisely  the  right  kind 
of  clothing  for  the  exact  amount  of  corn  offered.  He 
would  find  it  advantageous  to  accept  furs,  or  cattle,  or 
any  universally  desirable  commodity  in  payment  for  his 
corn  ;  and  then  he  could  easily  find  many  persons  who 
would  be  willing  to  exchange  clothing  for  the  furs  or 
cattle.  As  soon  as  all  persons  recognize  that  certain 
commodities  are  usually  in  demand  and  usually  ex- 
changeable, then  those  commodities  become  a  general 
medium  of  exchange.  The  exchange  of  product  A  for 
product  B  becomes  broken  up  into  two  processes  :  first, 
the  sale  of  A  for  some  universally  acceptable  medium 
of  exchange ;  and  second,  the  purchase  of  B  with  this 
medium.  In  this  way  the  universally  acceptable  com- 
modity acquires  a  new  and  distinct  use.  Hitherto  it  was 
valued  simply  as  an  object  of  personal  consumption  ;  now 
it  is  demanded  also  as  a  means  of  facilitating  exchanges. 


220  PRINCIPLES   OF  ECONOMICS. 

Formerly  it  was  a  common  commodity:  now  it  is  a  pecul- 
iar commodity  possessing  a  special  function,  —  namely, 
the  function  of  serving  as  a  general  medium  of  exchange. 
Whenever  a  commodity  acquires  this  function,  it  hecomes 
money.  Historically,  money  originated  in  this  way. 
Among  any  people  some  commodities  possess  greater  ex- 
changeability than  others,  and  the  most  convenient  of 
these  finally  serve  as  money.  A  list  of  the  commodities 
that  have  in  various  times  and  places  served  as  money 
can  be  indefinitely  extended.  Besides  cattle  and  furs, 
may  be  mentioned  rice,  tea,  salt,  tobacco,  dates,  cocoa- 
nuts,  grains,  cowry  shells,  and  many  different  metals. 
Traces  of  such  usage  still  remain  in  our  language.  The 
Latin  word pecunia,  money,  isirompeeus,  a  herd  of  cattle 
or  sheep ;  and  from  it  we  have  derived  our  word  pecurir 
iary.  So,  too,  the  English  word/ee  has  a  probable  etymo- 
logical connection  with  the  German  word  Vieh,  cattle. 

§  133.    Copper,  iron,  and  zinc,  as  well   as   gold  and 

silver,  have  served  as  money  ;  but  gradually  the  precious 

metals  have  displaced  the  baser.     Gold  and 

The  precious 

metals  as        silver  have  become  distinctively  the  money 

money. 

metals,  while  copper  has  retained  a  place  as 
small  change.  This  predominance  of  gold  and  silver  has 
come  about  for  the  following  reasons  :  — 

1.  Their  beauty  has  made  them  universally  desired 
for  purposes  of  ornamentation.  Probably  Ibis  is  the  pri- 
mary reason  why  they  attained  such  universal  currency 
as  commodities.  At  the  present,  the  amount  of  gold 
used  annually  in  manufactures  and  the  arts  is  valued  at 
not  less  than  fifty  or  sixty  millions  of  dollars. 


DEVELOPMENT  OF  MONEY.  221 

2.  They  are  durable,  and  can  be  easily  distinguished 
from  baser  metals. 

3.  They  are  difficult  to  procure,  and  therefore  have 
a  high  value.  Small  amounts  of  them  can  be  exchanged 
for  large  amounts  of  most  other  goods.  Hence  they  are 
portable,  and  since  early  times  have  been  able  to  seek 
distant  markets.  The  cost  of  producing  iron,  copper,  or 
zinc  has  so  cheapened,  on  the  other  hand,  that  the  sup- 
ply has  become  very  large.  Hence  they  have  decreased 
in  value,  so  that  they  are  too  bulky  to  serve  conveniently 
as  money. 

4.  They  are  highly  divisible.  Both  gold  and  silver 
are  divided  without  loss  into  small  units.  With  them 
it  is  easy  to  make  the  right  payment  for  any  commodity, 
whether  of  greater  or  of  less  value. 

5.  They  can  be  converted  easily  into  coins  of  uniform 
quality  and  weight. 

6.  They  have  been  extremely  uniform  in  value.  The 
world's  stock  of  gold  money  and  bars  is  valued  at  about 
14,000,000,000.  This  is  made  up  of  the  accumulations  of 
centuries,  and  the  annual  product  averages  only  from  two 
to  five  per  cent  of  this  amount.  Consequently  the  annual 
product  has  little  influence  upon  the  marginal  utility  of 
gold.  In  the  case  of  most  other  commodities  the  annual 
product  furnishes  the  greater  part  of  the  available  stock, 
and  the  marginal  utility  will  regularly  vary  with  every 
change  in  the  yearly  output.  People  have  always  been 
able  to  receive  the  precious  metals  in  payment  for  com- 
modities or  services,  with  confidence  that  the  medium  of 
payment  would  remain  relatively  stable  in  value  for  years. 


222  PRINCIPLES  OF  ECONOMICS. 

Furthermore,  the  demand  for  both  metals  is  extremely 
expansive,  so  that  it  increases  rapidly  as  their  value  falls. 
This  is  truer  of  gold  than  of  silver. 

7.  They  are  uniform  in  value  the  world  over. 
Possessing  high  specific  value  in  small  bulk,  they  are 
transported  cheaply  to  any  portion  of  the  globe  if  a 
temporary  difference  of  value  makes  it  profitable  to 
do  so. 

§  134.  The  precious  metals  circulated  at  first  in  the 
form  of  gold  and  silver  bars,  gold  dust,  and  nuggets. 
Coins  and  They  passed  by  weight,  and  those  who  re- 
comage.  ccivecl  them  had  to  provide  means  for  weigh- 
ing them,  and  sometimes  even  for  testing  their  genuine- 
ness or  purity.  So  far  the  development  of  money  was  the 
result  exclusively  of  the  acts  of  private  individuals  seeking 
to  facilitate  the  work  of  exchange.  The  disadvantages  of 
weighing  and  testing  the  money  metals  were  next  reme- 
died by  coinage.  The  first  step  was  to  stamp  a  bar, 
or  ring,  or  wire  of  gold  or  silver,  in  order  to  certify  its 
weight  and  fineness.  This  has  been  done  commonly  by 
governments,  but  sometimes  goldsmiths  of  recognized 
standing  have  stamped  pieces  of  gold  and  silver,  which 
have  been  received  without  question.  Such  a  certifica- 
tion of  the  weight  and  fineness  of  metal  saved  exchangers 
from  an  immense  amount  of  trouble.  Improvements  in 
the  art  of  coining  have  led  coiners  to  stamp  both  sides 
of  the  coin,  and  to  mill  the  edges.  This  prevents  clipping 
the  coin  or  otherwise  tampering  with  it,  since  such 
attempts  deface  the  coin  and  can  be  oasily  detected. 
Moreover,  the  designs  impressed  upon  coins  are  madq 


DEVELOP  MEM'   OE  MONEY.  22J* 

delicate  and  intricate  in  order  to  make  counterfeiting 
difficult.  A  well-developed  coinage  makes  it  possible  for 
money  to  pass  by  tale,  that  is,  by  count ;  and  exchangers 
no  longer  need  to  resort  to  weighing  in  order  to  avoid 
being  cheated.  Professor  Jevons  has  defined  coins  as 
"  ingots  of  which  the  weight  and  fineness  are  certified  by 
the  integrity  of  designs  impressed  upon  the  surface  of 
the  metal." 

Free  coinage  of  any  metal  exists  whenever  any  owner 
of  bullion  has  the  right  to  take  it  to  the  mints  and  have 
it  coined  into  money.     The  United  States  at  Free  coinage, 
the   present   time    allows   free   coinage    of  &r.atmtous 

i  °  coinage, 

gold,  but  the  coinage  of  silver  has  been  re-  brassage, 
stricted.  Gratuitous  coinage  is  a  different  thing.  The 
work  of  converting  bullion  into  coins  requires  a  consider- 
able outlay  for  labor,  machinery,  etc.  In  the  case  of 
larger  coins  the  expense  may  be  less  than  one  third  of 
one  per  cent,  while  in  the  case  of  small  coins  it  may 
amount  to  three  or  four  per  cent.  If  the  government 
makes  no  charge  for  coining  money,  and  bears  this  ex- 
pense itself,  coinage  is  gratuitous.  England,  since  1666, 
has  made  no  charge  for  coining  money.  The  United 
States  also,  except  for  the  period  1853  to  1875,  has  made 
no  charge  for  converting  standard  bullion  into  money. 
When  coinage  is  gratuitous,  the  amount  of  bullion  coined 
into  an  eagle  or  a  sovereign  will  equal  exactly  an  eagle 
or  a  sovereign.  If,  however,  a  mint  charge  is  made, 
bullion  will  be  worth  just  so  much  less  than  coins  con- 
taining the  same  weight  of  pure  metal.  Most  governments 
oblige  persons  who  bring  bullion  to  the  mints  to  bear 


224  PRINCIPLES   OF  ECONOMICS. 

the  expense  of  coining  it  into  money.     Such  a  charge, 

if  it  is  merely  sufficient  to  cover  the  expenses  of  coinage, 

is  called  brassage. 

Oftentimes   governments   retain  more  metal  than  is 

required  to  cover  the  costs  of  coinage.     Such  a  charge  is 

called  seigniorage.    Until  recent  times  manv 
Seigniorage. 

sovereigns  repeatedly  debased  the  money  ot 
their  countries  by  abstracting  a  seigniorage  of  ten,  twenty, 
and  sometimes  eighty  or  ninety  per  cent.  When  this  was 
done,  the  weight  of  the  coins  was  kept  up  by  increasing 
the  amount  of  alloy.  Modern  civilized  countries  usually 
debase  the  small  coins  used  for  fractional  currency,  and 
deduct  seigniorage  in  this  way.  For  instance,  since  1853 
the  fractional  silver  coins  of  the  United  States  have  been 
debased.  They  have  been  coined  exclusively  from  silver 
bought  by  the  government,  and  have  contained  less  than 
50,  25,  10,  and  5  cents  worth  of  silver,  although  the  gov- 
ernment has  paid  them  out  at  those  values.  It  is  impor- 
tant that  the  larger  coins  should  not  be  debased,  but  such 
a  policy  is  wise  in  the  case  of  fractional  currency.  It  pre- 
vents people  from  uselessly  melting  up  these  coins,  which 
are  worth  less  as  bullion  than  as  money. 

Many  facts  in  the  history    of   coinage  systems  give 

evidence   concerning  the   history   of   money.      Both  in 

Origin  of  coin-  Athens    and    in    Rome    the    earliest    coins 

age  systems.     sccm  to  have  been  stamped  with  the  figures 

I     of  oxen,  a  fact  which  probably  points  to  the  earlier  use 

of  cattle   as  money.     In   the   date   country  of  Persia, 

where  dates  once  served  as  a  medium  of  exchange,  the 

smallest  silver  coins  had  the  form  of  a  date.    The  names 


DEVELOPMENT   OF  MONEY.  225 

of  many  coins  can  be  traced  back  to  the  time  when  the 
precious  metals  circulated  by  weight.  The  Hebrew 
shekel  was  a  weight.  The  Roman  as  was  originally  an 
ingot  of  copper  supposed  to  weigh  an  as,  or  pound.  The 
French  livre,  the  Spanish  yeso  and  peseta,  the  English 
pound,  the  German  mark,  were  all  originally  names  of 
weights  which  were  used  to  denote  coins.  Constant 
debasement  by  European  kings  finally  reduced  these 
coins  far  below  the  original  weight.  These  facts  make 
it  clear  that  money  was  a  commodity  which  circulated 
by  weight  precisely  like  other  commodities. 

§  135.  The  notion  is  still  common  that  money  origi- 
nated in  some  act  of  government,  and  is  therefore  a 
creation  of  law.  Historically  there  can  be  Governments 
no  doubt  that  money  originated  solely  by  and  money, 
acts  of  individuals,  and  that  governments  for  a  long 
time  had  nothing  to  do  with  the  establishment  or  regu- 
lation of  a  medium  of  exchange.  At  a  later  date,  how- 
ever, the  action  of  governments  began  to  affect  the 
institution  of  money.  On  the  one  hand,  they  instituted 
systems  of  coinage.  On  the  other,  they  imposed  lines 
payable  in  money,  and  received  money  in  payments  to 
the  public  treasury.  They  selected  the  commodity 
which  had  long  passed  as  money  between  individuals, 
and  made  it  the  means  of  payment  in  the  case  of  fines 
and  public  dues.  This  extended  the  usefulness  of 
money,  but  did  not  originate  it.  The  work  of  coinage 
was  left  in  the  hands  of  private  individuals  until  com- 
paratively recent  times.  Gradually  the  need  of  uni- 
formity and   absolute  security   forced   governments   to 


226  PRINCIPLES   OF  ECONOMICS. 

make  coinage  an  exclusively  public  function,  and  to  pro- 
hibit by  severe  penalties  coinage  by  private  individuals. 

After  establishing  public  systems  of  coinage,  govern- 
ments have  taken  a  further  step  in  developing  the  insti- 
tution of  money.     They  have  declared  that 
Legal  tender. 

their  coins  shall  be  received  in  payment  of 

private  debts.  In  this  way,  coins  are  made  a  legal  ten- 
der which  must  be  received  in  discharge  of  debts,  except 
when  persons  are  allowed  in  special  contracts  to  agree 
upon  some  other  commodity  as  a  means  of  payment. 
Thus,  in  the  United  States,  gold  coins,  the  silver  dollar, 
greenbacks  (or  United  States  notes),  and  treasury  notes 
are  legal  tender ;  but  courts  will  enforce  contracts  which 
call  for  the  payment  of  gold. 

§  136.    Money  was  originally  a  mere  commodity  which, 

on  account  of  its  superior  desirability  and  convenience, 

obtained  general  currency  as  a  medium  of 

Summary. 

exchange.  Hereby  it  acquired  a  new  use 
distinct  from  its  other  uses  as  a  consumption-good. 
Men  began  to  demand  gold  and  silver,  not  merely  for 
use  in  manufactures  and  the  arts,  but  also  for  a  medium 
of  exchange.  We  may  therefore  speak  of  a  demand 
for  the  precious  metals  for  employment  as  money,  and 
a  demand  for  them  for  employment  in  the  arts.  Upon 
this  combined  demand  their  utility  depends.  Gold  and 
silver  were  useful  and  valuable  commodities  before  they 
were  ever  used  as  money  ;  and  they  would  remain  valu- 
able commodities  even  if  people  should  no  longer  employ 
them  as  a  medium  of  exchange.  Yet  their  value  is 
increased  by  the  money  demand  for  them,  and  it  would 


THE   VALUE   OF  MONEY.  227 

fall  if  they  should  cease  to  be  demanded  as  money.  At 
a  late  period  in  the  history  of  money,  the  influence 
of  governments  was  felt.  Fines  and  public  dues  were 
made  payable  in  the  commodity  which  served  as  money, 
and  legal-tender  laws  enabled  it  to  perform  more  per- 
fectly its  work  as  a  medium  of  exchange. 

II.    The  Value  of  Metallic  Money. 

§  137.  Gold  and  silver  as  commodities  have  a  certain 
marginal  utility  which  depends  upon  their  usefulness  as 
consumption-goods.      When   they  are  used 

.  .  .  .  .  The  marginal 

as  money,  their  marginal  utility  for  this  use   utility  of 

is  simply  the  utility  of  the  quantity  of  goods  money* 
which  they  will  buy.  When  prices  are  high,  a  great 
deal  of  money  is  required  to  purchase  commodities  ;  and 
when  prices  are  low,  a  large  quantity  of  goods  can  be 
bought  with  a  little  money.  The  marginal  utility  of 
money  will  be  high,  therefore,  when  general  prices  are 
low  ;  and  will  be  low  when  general  prices  are  high. 
We  must  now  consider  the  causes  which  determine 
whether  the  purchasing  power  of  money  (that  is,  its 
marginal  utility)  shall  be  high  or  low. 

§  138.    Prices  are  the  values  of  commodities  expressed 
in  terms  of  money.     It  is  possible  for  commodities  as  a 
whole  to  exchange  at  one  time  for  very  dif- 
ferent amounts  of  money  from  what  they  com-  the^enerai 
mand  at  another.     Between  1850  and  1873  levelof 

prices, 
prices    rose    gradually  all   over   the    world, 

while  since  1873  they  have  gradually  fallen.     It  is  not 

easy  to  determine  whether  the  general  level  of  prices  is 


228  PRINCIPLES  OF  ECONOMICS. 

rising  or  falling,  because  the  prices  of  all  commodities 
and  services  do  not  move  in  the  same  direction  at  any 
one  time.  The  simplest  method  of  determining  varia- 
tions in  general  prices  is  the  system  of  index  numbers. 
The  prices  of  a  large  number  of  commodities  are  deter- 
mined in  some  year,  and  these  prices  are  then  called  100 
as  a  basis  of  comparison.  If  one  hundred  commodities 
should  be  taken,  the  index  number  for  the  first  year 
would  be  10,000,  that  is,  the  sum  of  the  prices  of  all  the 
commodities.  Suppose  that  at  the  end  of  the  next  year 
it  is  found  that  ten  commodities  have  risen,  on  the 
average,  10  per  cent ;  that  forty  commodities  have  fallen, 
on  the  average,  10  per  cent ;  and  that  fifty  commodities 
remain  unchanged  in  price.  Then,  by  adding  the  prices 
of  all  the  commodities  reduced  to  this  scale  of  100,  we 
should  get  9,700  as  the  index  number  for  the  second 
year.  A  comparison  of  the  index  numbers  for  the  two 
years  shows  an  average  fall  in  prices  amounting  to  three 
per  cent.  In  order  for  this  method  of  index  numbers  to 
be  satisfactorily  used,  a  large  number  of  commodities 
must  be  examined;  and  the  price  of  each  one  should 
be  given  importance  in  the  final  result  in  proportion  to 
the  quantity  regularly  marketed  and  consumed.  Thus 
wheat,  corn,  and  pig  iron  should  be  given  more  weight 
than  drugs,  spices,  and  platinum.  During  the  last 
twenty  years  all  methods  of  computation  show  a  gradual 
decline  in  prices. 

§  130.  We  may  explain  variations  in  general  prices 
in  the  following  manner.  We  may  regard  the  amount 
of  money  in  a   community  as  an    important   factor    in 


THE    VALUE   OF  MONEY.  229 

determining  the  prices  that  people  will  be  able  to  pay 
for  commodities.  In  the  words  of  Mr.  Mill,  kt  Money 
acts   upon  prices  in    no  other  way  than   by 

,.,-,         i  •  ,  c  -..,.         Explanation 

being  tendered  m  exchange  tor  commodities.  0f  changes 
The  demand  which  influences  the  prices  of  i*1  general 

prices. 

commodities  consists  of  the  money  offered  for 
them."  As  the  amount  of  money  in  the  hands  of  con- 
sumers increases,  the  marginal  utility  of  each  piece  of 
money  will  decrease ;  the  surplus  of  the  marginal  utility 
of  commodities  over  the  marginal  utility  of  their  money 
cost  will  increase  ;  and  the  same  number  of  commodities 
will  he  in  demand  at  higher  prices,  or  a  larger  number 
of  commodities  will  he  demanded  at  the  same  prices. 
On  the  other  hand,  we  may  regard  the  commodities  pro- 
duced for  sale  in  any  community  as  a  stock  of  goods 
which  producers  desire  to  exchange  for  money.  These 
commodities,  as  a  rule,  have  no  utility  for  the  producers 
except  as  they  can  be  sold.  Then  we  can  say  that  the 
demand  for  money  will  depend  upon  the  amount  of 
goods  offered  by  sellers.  Now  the  ratio  at  which  com- 
modities will  exchange  for  money  (that  is,  the  general 
level  of  prices)  will  depend  upon  the  conditions  of  the 
demand  for  money  and  the  supply  of  money.  This  can 
be  shown  by  assuming  the  following  cases: — ■ 

1.  Assume  that  the  number  of  commodities  offered 
for  sale  remains  unchanged,  but  that  the  amount  of 
money  in  the  community  is  increased,  as  it  was  in  this 
country  after  the  discovery  of  the  Californian  gold 
mines.  Then  the  increased  stock  of  money  will  tend  to 
stimulate  the  demand  for  commodities;  and  producers 


230  PRINCIPLES  OF  ECONOMICS. 

will,  as  a  rule,  be  enabled  to  sell  their  stocks  of  goods 
for  higher  prices.  Conversely,  if  the  mines  become 
exhausted,  as  occurred  during  the  later  years  of  the 
Roman  Empire,  and  the  stock  of  money  decreases  by 
gradual  waste,  then  the  demand  for  commodities  will 
gradually  decline,  and  a  lower  level  of  general  prices 
will  be  the  result.  It  is  apparent,  therefore,  that,  when 
the  stock  of  money  increases,  the  purchasing  power  of 
each  piece  of  money  will  tend  to  be  less  than  it  formerly 
was.  On  the  other  hand,  a  decrease  in  the  stock  of 
money  tends  to  increase  the  purchasing  power  of  each 
piece.  Prices  will  tend  to  rise,  therefore,  when  the 
stock  of  money  increases ;  and  they  will  tend  to  fall  as 
it  decreases. 

2.  Next  we  must  study  the  effect  of  changes  in  the 
amount  of  commodities  produced  for  sale.  We  will 
suppose  that  the  stock  of  money  remains  unchanged. 
Now,  in  a  progressive  country  improvements  in  produc- 
tion continually  increase  the  number  of  commodities 
that  can  be  turned  out  with  a  given  expenditure  of  labor 
and  capital.  Furthermore,  every  increase  of  population 
may  have  a  tendency  to  increase  the  productive  forces 
of  a  country,  and  so  to  increase  the  production  of 
commodities.  If  the  number  of  commodities  produced 
for  sale  increases,  while  the  amount  of  money  remains 
the  same,  producers  will  have  to  dispose  of  a  larger 
stock  of  goods  in  markets  where  the  general  demand  for 
commodities  remains  unchanged.  Competition  between 
producers  will  tend  to  become  sharper  under  such  cir- 
cumstances, and   commodities  will   exchange   for   less 


THE   VALUE  OF  MONEY.  231 

money  than  they  formerly  commanded.  This  means 
that  general  prices  will  be  lower.  Conversely,  if  the 
production  of  commodities  is  decreased  so  that  fewer 
goods  are  brought  to  market,  prices  will  tend  to  rise. 

3.  We  conclude,  therefore,  that  prices  tend  to  vary 
directly  as  the  amount  of  money  which  consumers  take 
to  market  to  exchange  for  commodities,  and  that  they 
will  tend  to  vary  inversely  as  the  number  of  commod- 
ities which  producers  bring  to  market  to  exchange  for 
money.  But  it  is  important  to  notice  that  both  the 
supply  of  money  and  the  supply  of  commodities  may 
vary/  at  the  same  time.  Thus  an  increased  supply 
of  money  may  coincide  with  an  increased  production 
of  commodities,  or  a  decreased  supply  of  money  may 
coincide  with  a  decreased  supply  of  commodities.  In 
such  cases  one  change  tends  to  offset  the  other.  On 
the  other  hand,  a  larger  supply  of  money  coinciding 
with  a  smaller  supply  of  commodities,  or  a  smaller 
supply  of  money  coinciding  with  a  larger  production  of 
commodities,  would  produce  greatly  intensified  effects. 

§  140.  Of  the  world's  stock  of  gold  and  silver,  only 
a  part  is  in  the  form  of  money.  A  considerable  portion 
exists  as  bullion  or  as  manufactured  com-  Bullion  and 
modities.  But  gold  and  silver  in  the  form  money- 
of  bullion  or  of  manufactured  goods  can  be  melted  up 
readily  and  converted  into  money,  if  free  coinage  is 
allowed,  while  gold  and  silver  coin  with  equal  ease  can 
be  melted  into  bullion.  It  follows  that  the  marginal 
utility  of  the  precious  metals  as  money  can  never  be 
very  different  from  their  marginal  utility  as  bullion.     If 


232    .  PRINCIPLES  OF  ECONOMICS. 

a  change  of  fashion  or  of  taste  increases  the  marginal 
utility  of  bullion,  gold  or  silver  coins  will  be  melted  up. 
«is  will  continue  until  the  increase  in  the  supply  of 
bullion  will  lead  to  such  a  decrease  in  its  marginal 
utility  that  people  no  longer  care  to  convert  money 
into  bullion.  On  the  other  hand,  if  money  commands 
mote  commodities  than  formerly,  bullion  will  be  con- 
verted into  coin,  and  the  supply  of  money  will  be 
increased.  Finally,  the  existence  of  a  large  demand 
for  gold  and  silver  in  the  arts  tends  to  make  their  value 
stable.  If  the  value  of  money  increases  (that  is,  if 
prices  fall),  the  supply  of  money  will  tend  to  increase 
through  the  melting  up  of  bullion.  Conversely,  a  fall 
in  the  value  of  money  (that  is,  a  rise  of  prices)  will 
tend  to  be  checked  by  a  greater  use  of  the  precious 
metals   in  the  arts. 

§  141.  General  prices  depend  upon  the  demand  for 
The  supply  of  money  and  the  supply  of  money.  But  it  is 
money  and      necessary  to  consider  all  the  elements  that 

the  demand  J 

for  money.  determine  demand  and  supply. 
1.  The  number  of  commodities  which  producers  bring 
to  market  is  not  the  only  element  that  influences  the  de- 
mand for  money.  A  commodity  may  be  produced  by  a 
farmer  or  a  manufacturer,  then  sold  to  a  wholesale  dealer, 
then  sold  by  the  wholesaler  to  a  retail  merchant,  then  sold 
by  the  retailer  to  the  person  who  is  to  consume  it.  The 
greater  part  of  the  goods  produced  for  sale  changes 
hands  at  least  three  times  in  passing  from  the  original 
producers  to  the  consumers.  If  one  thousand  commod- 
ities are  produced  for  sale  in  any  community,  we  may 


THE    VALUE   OF  MONEY.  233 

assume  that  at  least  three  thousand  exchanges  will  have 
to  he  effected  hefore  these  thousand  articles  reach  the 
final  consumers.  Evidently  the  demand  for  money  will 
be  three  times  as  great  as  it  would  be  if  the  goods  passed 
directly  from  the  farmer  or  manufacturer  to  the  con- 
sumer. It  appears,  then,  that  the  demand  for  money 
depends  upon  two  factors,  (a)  the  number  of  commodi- 
ties produced  for  sale,  and  (6)  the  average  number  of 
times  each  commodity  changes  hands  on  its  way  from 
producer  to  consumer. 

2.  The  supply  of  money  does  not  depend  solely  upon 
the  number  of  pieces  available  for  the  purchase  of  com- 
modities. Suppose  that  one  thousand  commodities  are 
exchanged  three  times  each,  so  that  three  thousand 
exchanges  are  effected.  Now  one  thousand  pieces  of 
money  may  suffice  to  effect  all  these  exchanges,  if  each 
piece  passes  from  one  person  to  another  three  times 
during  the  time  that  the  thousand  commodities  are 
being  exchanged.  As  a  matter  of  fact,  the  amount  of 
money  in  any  country  falls  far  short  of  the  volume  of 
business  to  be  transacted  in  any  season  or  year.  On 
July  1, 1895,  the  amount  of  money  in  circulation  among 
the  people  of  the  United  States  was  about  11,602,000,000, 
an  average  amount  of  $22.93  for  each  person  in  the 
country.  In  the  course  of  the  year  1895  each  piece 
of  money  served  to  effect  a  considerable  number  of 
exchanges,  so  that  the  total  amount  of  commodities 
exchanged  for  money  vastly  exceeded  the  amount  of 
money  in  the  country.  Manifestly,  $1,600,000,000  cir- 
culating from  one  person  to  another  on  the  average  one 


234  PRINCIPLES  OF  ECONOMICS. 

hundred  times  in  the  course  of  a  year,  will  do  as  much 
money  work  as  $16,000,000,000  each  piece  of  which 
changes  hands  only  ten  times  during  the  same  period. 
Evidently  the  supply  of  money  depends  upon  the  two  fac- 
tors, (a)  the  number  of  pieces  of  money,  (b)  the  average 
rapidity  with  which  they  circulate.  It  will  be  well  to 
explain  clearly  what  is  implied  by  the  phrase  "  rapidity 
of  circulation  "  tvhen  applied  to  money.  If  the  mem- 
bers of  a  community  are  prosperous,  they  will  be  able  to 
purchase  commodities  freely.  The  demand  for  both  con- 
sumers' and  producers'  goods  will  be  active.  Whatever 
incomes  consumers  receive  will  be  quickly  expended  for 
consumers'  goods ;  or  will  be  invested,  and  so  will  be 
exchanged  for  producers'  goods.  Merchants  will  find 
their  stocks  of  goods  in  active  demand,  and  commod- 
ities will  pass  quickly  from  producer  to  consumer. 
Under  such  circumstances,  a  given  stock  of  money 
will  circulate  much  more  rapidly  than  when  trade  is 
dull  and  people  are  less  prosperous.  There  are,  of 
course,  limits  beyond  which  the  rapidity  with  which 
money  circulates  cannot  be  increased ;  and,  further- 
more, it  will  be  greater  in  some  communities  than  in 
others.  The  rapidity"  of  circulation  will  regularly  be 
great  in  proportion  to  the  activity,  enterprise,  and  pros- 
perity of  each  community. 

3.  While  this  statement  of  the  various  elements  that 
determine  the  demand  for  money  and  the  supply  of 
money  complicates  the  theory  of  general  prices,  the  dif- 
ficulty is  not  so  great  as  it  might  seem.  In  the  United 
States  at  any  given  time,  the  rapidity  with  which  money 


THE   VALUE  OF  MONEY.  235 

circulates  is  fixed  within  quite  narrow  limits,  and  it  can- 
not change  to  any  great  extent.  So,  also,  the  average 
number  of  times  that  commodities  pass  from  one  person 
to  another  before  they  reach  the  final  consumer  is  some- 
thing that  is  fixed  quite  definitely  at  any  given  time  by 
the  habits  and  customs  of  our  people.  If  the  number  of 
pieces  of  money  in  the  United  States  increases,  it  is  safe 
to  assume  that  rapidity  of  circulation  will  not  vary 
greatly,  and  that  the  supply  of  money  will  be  increased. 
Similarly,  if  the  production  of  commodities  increases,  it 
is  safe  to  assume  that  there  will  be  no  considerable 
change  in  the  average  number  of  times  that  each  com- 
modity changes  hands  ;  so  that  an  increase  of  commodi- 
ties will  be  practically  equivalent  to  an  increase  of  the 
demand  for  money. 

§  142.    If  we  assume  the  world's  stock  of  the  pre- 
cious metals  to  be  fixed,  then  their  values  will  depend 
simply  upon  the  supplies  of  gold  and  silver  The  cost  of 
available  for  money  and  for  use  in  the  arts,  the  precious 
and  the  demand  for  both  metals.    The  prob-  metals  finaUy 

1  influences 

lem  becomes,  under  such  circumstances,  their  value, 
exactly  similar  to  the  problem  of  market  prices.  But, 
as  a  matter  of  fact,  gold  and  silver  are  produced,  like 
any  other  commodities,  by  men  who  desire  to  make  a 
profit  out  of  the  operation  of  their  mines.  If  the  value 
of  money  is  high,  the  profits  of  mining  gold  and  silver 
will  be  large,  and  the  output  will  begin  to  increase. 
Conversely,  a  low  value  of  money  will  decrease  profits 
and  reduce  the  production  of  the  precious  metals. 
Gradually  the  supply  of  money  will  be  increased  or  de* 


236  PRINCIPLES   OF  ECONOMICS. 

creased  as  the  output  from  the  mines  slowly  changes. 
Several  years  may  be  required  before  a  change  in  the 
world's  output  of  gold  or  silver  will  appreciably  affect 
the  value  of  the  enormous  stock  of  the  precious  metals. 
But,  in  the  long  run,  changes  in  the  production  of  gold 
and  silver  will  make  their  value  approximate  the  mar- 
ginal expenses  of  producing  them. 

Let  us  consider  in  greater  detail  the  manner  in  which 
the  cost  of  producing  the  money  metals  affects  their 
Detailed  ex-  value.  Suppose  that  prices  are  low.  Then 
pianations.  ^lQ  monev  cost  0f  doing  all  business  will 
tend  to  decrease,  and  the  expenses  of  mining  gold  and 
silver  will  become  smaller.  At  the  same  time,  the  low 
level  of  general  prices  means  that  the  purchasing  power 
of  the  money  metals  is  increased.  The  lower  cost  of 
production  will  make  mining  very  profitable,  and  will 
increase  the  annual  output.  Thus  a  fall  of  prices  tends 
to  cause  an  increase  of  the  supply  of  the  money  metals. 
Ultimately  the  increased  supply  will  lower  the  value  of 
money,  and  so  restore  a  higher  level  of  prices.  Again, 
suppose  that  an  increasing  supply  of  gold  or  silver,  or 
any  other  cause,  produces  a  decline  in  the  value  of 
money  and  a  rise  of  prices.  Then  the  higher  level  of 
prices  will  increase  the  expense  of  doing  business,  and 
will  therefore  increase  the  money  cost  of  mining.  The 
lower  value  of  money  will  gradually  cause  a  decrease  in 
the  production  of  gold  and  silver.  This  takes  place  in 
the  following  way.  Sonic  mines  are  much  richer  than 
others,  and  from  them  gold  can  be  produced  at  a 
smaller  expense.     "When  prices  rise  and  the  expenses  of 


THE   VALUE  OF  MONEY.  237 

milling-   increase,  the   poorer   mines  can  no   longer    be 

operated  at  a  profit  and  will  cease  to  be  worked.     The 

general  level  of  prices,  therefore,  will  help  to  determine 

what  mines  can  be  operated  profitably,  and  what  mines 

cannot  be  worked.     Rising  prices  will  gradually  shut  off 

the  supplies  of  metals  secured  from  the  poorer  mines. 

The  adjustment  of  the  money  metals  to  the  expenses 

of  producing  them  is  effected   slowly  by  a 

1  .      °  J       J         The  value  of 

gradual  increase  or  decrease  of  the  supply,  money  is  ad- 
For  long  periods  of  years  there  may  be  no  fectiy  t^uie" 

correspondence.     But,  in  the  long  run,  the  C0St°fPr<>- 

1  '  .  duction. 

cost  of  producing  gold  and  silver  from  the 

mines   that  form  the  sources  of  supply   will  exert  an 
influence  upon  their  value. 

§  143.  In  applying  this  theory  it  should  not  be  for- 
gotten that  hitherto  the  production  of  the  precious 
metals  has  been  conducted  in  a  haphazard    .  .    , 

1  Actual  condi- 

manner.      By    mere    accident     rich    mines  tionsoftne 

have  been  discovered  in  South  America,  0f  gold  and 
California,  Australia,  and  South  Africa ;  s  ver' 
and  the  world's  stock  of  gold  and  silver  has  been  in- 
creased suddenly  without  any  special  reference  to  the 
existing  level  of  general  prices.  Yet,  even  in  these 
cases,  two  things  have  ever  been  true :  First,  the 
search  for  the  precious  metals  is  always  most  active 
when  their  purchasing  power  is  high.  Second,  when- 
ever sudden  discoveries  of  the  money  metals  have  in- 
creased the  stock  of  money  and  raised  prices,  the  poorer 
mines  have  had  to  be  abandoned  ;  and  in  this  manner 
production  has  been  checked.     At  the  present  time  gold 


238  PRINCIPLES  OF  ECONOMICS. 

and  silver  are  mined  in  a  far  more  systematic  manner 
than  ever  before,  and  the  principles  laid  down  will  oper- 
ate more  promptly.  The  rise  in  the  purchasing  power 
of  gold  during  the  last  twenty  years  has  stimulated  gold 
mining  in  a  wonderful  manner.  Formerly  gold  was 
produced  by  crude  methods,  mainly  from  rich  placer 
deposits  or  from  very  rich  ores.  The  placer  deposits 
are  limited,  and  have  been  discovered  and  worked  in  a 
very  haphazard  manner.  But  within  recent  years  the 
methods  of  mining  gold-bearing  ores  have  been  vastly 
improved.  Ores  which  formerly  could  not  be  worked  at 
a  profit  are  now  handled  by  new  methods  in  such  a  way 
as  to  yield  very  large  returns.  In  the  future  the  busi- 
ness of  gold  mining  will  be  conducted  in  anything  but  a 
haphazard  manner.  Silver  has  always  been  produced 
by  a  more  systematic  process  of  separating  it  from  the 
ores  in  which  it  usually  occurs.  Its  production  has  not 
depended  upon  the  chance  discovery  of  rich  surface 
deposits,  for  it  seldom  occurs  in  its  native  state.  In 
recent  times  the  production  of  gold  and  silver  has  been 
quite  regular  from  year  to  year,  increasing  or  decreasing 
in  a  gradual  manner.  For  the  future,  we  have  a  right 
to  anticipate  a  systematic  production  of  both  metals  in 
such  quantities  as  shall  be  commercially  profitable. 
§  144.    At   the  opening  of  the  Christian  Era,  large 

amounts  of  gold  and  silver,  accumulated  bv 
History  of  the  &  .  J 

production      the  conquered  nations  of  the  lands  adjoin- 

siiver.  aD       ing  the  Mediterranean  Sea,  had  been  seized 

by  the  Romans  and  thrown  into  circulation 

throughout  their  empire.     A   rise   of   prices   hindered 


THE   VALUE  OF  MONEY.  2^'J 

further  mining  of  the  precious  metals,  while  wasteful 
methods  of  operation  caused  a  rapid  exhaustion  of  the 
richest  mines.  Gradually  the  production  of  the  precious 
metals  ceased,  the  existing  stocks  were  dissipated,  and  a 
fall  of  prices  set  in  throughout  the  Roman  world.  From 
the  fourth  century  to  the  sixteenth  there  was  a  positive 
money  famine.  For  several  centuries  practically  no  ad- 
ditions were  made  to  the  world's  stock  of  gold  and  silver, 
and  the  art  of  mining  seemed  to  be  lost.  Toward  the 
close  of  the  Middle  Ages,  mining  was  commenced  m 
Austria,  Hungary,  and  Germany  ;  but  prices  continued 
at  a  very  low  level  until  some  years  after  the  discovery 
of  America.  After  1545  the  Peruvian  mines  poured  a 
flood  of  silver  into  Europe,  and  finally  prices  began  to 
rise  at  a  rapid  rate.  After  1700  the  Brazilian  gold  mines 
turned  out  large  quantities  of  gold,  while  later  in  the 
same  century  the  Mexican  mines  began  to  yield  large 
amounts  of  silver.  The  combined  effects  of  these  dis- 
coveries of  gold  and  silver  were  to  cause  a  rise  of  prices 
of  three  or  four  hundred  per  cent  between  the  years  1600 
and  1800.  In  1848  came  the  discovery  of  gold  in  Cali- 
fornia, and  three  years  later  the  Australian  production 
became  very  large.  About  1800  the  average  annual  pro- 
duction of  gold  was  571,000  ounces.  In  1850  it  suddenly 
increased  to  four  times  that  amount.  By  1860  it  had  in- 
creased to  nearly  6,500,000  ounces,  and  prices  had  begun 
to  rise  again  all  over  the  world.  After  1860  the  gold 
production  gradually  declined,  but  it  is  probable  that 
prices  rose  at  least  twenty  per  cent  between  1850  and 
1870.     During  the  decade,  1860  to  1870,  the  production 


240  PRINCIPLES   OF  ECONOMICS. 

of  silver  began  to  increase,  particularly  in  the  United 
States,  where  the  mines  of  Nevada  were  being  opened. 
Prior  to  1860  the  world's  annual  production  had  never 
equaled  30,000,000  ounces,  but  between  1871  and  1875 
it  averaged  03,000,000  ounces.  Since  1875  the  silver  out- 
put has  constantly  increased,  amounting  to  169,000,000 
ounces  in  1895.  This  is  more  than  five  times  the 
average  annual  production  at  any  period  previous  to 
1860.  During  the  last  five  years  the  world's  product  of 
gold  has  largely  increased.  In  1890  about  5,749,000 
ounces  were  produced.  For  the  year  1895  the  production 
was  about  9,688,000  ounces. 

§  145.    It  will  help  us  to  avoid  misunderstanding  if  we 

note  that  this  explanation  of  the  relation  of  money  to 

prices  concerns  general  prices,  and  explains 

and  prices  of    on^y  ^ne  well-known  fact   that   money  will 

individual      VjUy  m0re  commodities  at  some  times  than  at 

commodities.  J 

others.  Independently  of  changes  in  general 
prices,  the  prices  of  wheat,  or  corn,  or  iron  may  rise  and 
fall  according  to  the  particular  conditions  of  the  demand 
for  such  commodities  and  the  supply  of  them.  When 
general  prices  are  rising,  it  is  possible  for  the  prices  of  a 
minority  of  goods  to  fall,  on  account  of  special  causes 
affecting  their  supply  and  demand  ;  while,  in  a  period  of 
falling  prices,  some  few  commodities  may  remain  station- 
ary in  price,  or  may  even  rise. 

§  146.    Historically  the  earliest  function  of  money  was 

The  functions  ^°  scrvc  as  a  medium  of  exchange.     For  this 

of  money.        purpose  it  originated.     But  money  has  come 

to  perform  other  functions.      It  serves,  in  the  second 


THE    VALUE   OF  MONEY.  241 

place,  as  a  value  denominator,  a  common  denominator  in 
which  the  exchange  values  of  other  commodities  are  ex- 
pressed. Not  only  commodities,  hut  also  wages,  salaries, 
rents,  and  all  kinds  of  puhlic  and  private  payments  are 
expressed  in  terms  of  money.  This  function  is  distin- 
guishable from  the  first  function  of  money.  It  has  hap- 
pened that  one  kind  of  money  has  served  as  a  medium 
of  exchange,  while  another  has  served  as  a  value  denom- 
inator. In  the  American  colonies  the  values  of  all  com- 
modities and  services  were  expressed  in  terms  of  English 
money  (that  is,  in  pounds,  shillings,  and  pence),  while  the 
actual  circulating  medium  was  composed  almost  entirely 
of  Spanish,  Portuguese,  or  Dutch  coins.  Money  which 
serves  as  a  value  denominator,  but  not  as  a  medium  of 
exchange,  is  called  money  of  account.  Closely  connected 
with  this  second  function  of  money  is  a  third,  the  func- 
tion of  serving  as  a  standard  for  deferred  'payments.  In 
renting  lands,  or  in  agreeing  to  pay  interest  and  princi- 
pal of  mortgages  or  bonds  for  a  long  period  of  time,  per- 
sons are  constantly  entering  into  contracts  to  pay  debts 
at  future  dates.  These  long-term  contracts  may  extend 
over  u  period  of  five,  twenty,  or  even  one  hundred  years. 
In  such  cases  money  usually  serves  as  a  standard  for 
deferred  payments.  But  other  commodities  have  been 
used.  Colleges  of  the  English  universities,  Oxford  and 
Cambridge,  have  for  centuries  leased  their  lands  for 
corn  rents.  These  corn  rents  have  varied  far  less  than 
money  rents  would  have  varied  during  the  centuries  that 
they  have  been  in  force.  Revolutionary  changes  in  the 
value  of  money  make  it  an  imperfect  standard  for  long- 


242  PRINCIPLES  OF  ECONOMICS. 

deferred  payments.  Finally,  money  performs  a  fourth 
function,  that  of  serving  as  a  legal  tender  for  all  debts. 
Historically,  this  has  been  a  function  which  governments 
have  conferred  upon  money  at  a  late  stage  in  its  develop- 
ment. The  precious  metals  served  as  a  medium  of  ex- 
change for  centuries  before  legal-tender  laws  were  even 
thought  of,  while  gold  would  serve  as  money  at  the 
present  day  even  if  all  legal-tender  laws  should  be  re- 
pealed. Silver  also  would  circulate  readily  in  some 
countries  without  being  made  a  legal  tender,  but  in 
Europe  and  the  United  States  its  use  would  be  consider- 
ably restricted.  The  wholesale  trade  of  civilized  coun- 
tries requires  the  use  of  gold.  The  superior  convenience 
of  gold  for  large  payments  has  caused  the  commercial 
world  to  show  a  marked  preference  for  that  metal. 
Until  1861  many  foreign  gold  and  silver  coins,  even  when 
our  government  refused  to  make  them  legal  tender,  cir- 
culated in  the  United  States.  Certain  well  known  coins, 
such  as  the  English  sovereign,  have  obtained  currency 
in  many  parts  of  the  world  where  they  have  not  been  a 
legal  tender. 

III.    Debased  Money.     Gresham's  Law. 

§  147.    Governments  have  often  declared  various  gold 

and  silver  coins  to  be  full  legal  tender  in  payment  of 

Debased  debts.     When    this   has   been  done,  it   has 

money.  frequently   happened   lhat   the   legal-tender 

power  of  two  different  coins  has  been  made  the  same, 

while   one   coin   has   contained    metal    of   considerably 


DEBASED  MONEY.  243 

greater  value  in  the  bullion  market  than  the  other  lias 
possessed.  For  instance,  in  1895  the  average  market 
value  of  the  line  silver  in  one  of  our  silver  dollars  was 
about  one  twentieth  of  the  market  value  of  the  gold 
bullion  contained  in  a  ten-dollar  gold-piece,  or  eagle. 
In  other  words,  ten  silver  dollars  were  given  by  law  the 
same  power  as  the  eagle  possessed  in  the  matter  of  pay- 
ing debts  ;  while  the  silver  bullion  contained  in  them 
had  about  one  half  the  market  value  of  the  gold  bullion 
contained  in  the  eagle.  Whenever  a  coin  is  given  a  legal- 
tender  power  greater  than  the  market  value  of  the  gold 
or  silver  bullion  which  it  contains,  it  becomes  a  debased 
coin.  We  have  now  to  consider  the  results  of  giving 
equal  legal-tender  power  to  coins  that  have  different 
bullion  values. 

§  148.    At  any  given  time  a  community  or  a  nation 
will  need  a  certain  number  of  pieces  of  money  in  order 
to  carry  on  its  exchanges  at  the   existing  The  quantity 
level  of  prices.     Suppose  that  commodities  ^^ 
to   the   value   of    $1,000,000   are   produced  nation  needs, 
annually,  and   that  they  change  hands  three    times  in 
passing   from  the  producers  to  the  consumers.      Then 
13,000,000  of  exchanges  will  need  to  be  effected  each 
year.     Suppose  that  the  community  possesses  a  stock  of 
money  amounting  to  $60,000,  and  that  each  dollar  cir- 
culates with  a  rapidity  sufficient  to  cause  it  to  pass  from 
one  person  to  another  fifty  times  during  each  year.    Then 
the  stock  of  money  will  be  just  sufficient,  during  the 
course  of  the  year,  to  effect  all  the  $3,000,000  of  ex- 
changes ;  and  the  general  level  of  prices  for  the  year 


244  PRINCIPLES  OF  ECONOMICS. 

will  be  one  dollar.  Now,  if  the  production  of  com- 
modities remains  unchanged,  the  community  will  need 
$60,000  of  money  to  effect  its  exchanges  at  the  existing 
level  of  prices.  If  the  production  of  commodities  de- 
creases, less  money  will  be  needed  to  maintain  the 
existing  level  of  prices  ;  while,  if  production  increases, 
more  money  will  be  needed,  assuming  in  both  cases  that 
all  the  conditions  of  exchange  remain  the  same. 

§  149.    Now  suppose  that  the  nation's  stock  of  money 

has  consisted  hitherto  of  gold  dollars,  each  of  which  has 

contained  23.22  grains  of  fine  gold.1     Sup- 

Circulation  °  °  * 

of  debased  pose  that  the  government  decides  to  allow 
any  person  to  bring  371.25  grains  of  fine 
silver  2  to  the  mints,  and  to  have  this  quantity  of  silver 
converted  into  a  coin  which  is  called  a  dollar.  Suppose 
that  this  silver  dollar  is  allowed  by  law  to  have  the  same 
power  to  pay  debts  which  the  gold  dollar  possesses, 
while  the  market  value  of  the  bullion  contained  in  each 
silver  coin  is  only  one  half  as  great  as  the  value  of  the 
bullion  contained  in  each  gold  coin.3  We  should  then 
have  an  example  of  the  influence  of  bad  or  debased 
money  in  driving  out  good  money.     With  other  things 

1  This  is  the  weight  of  the  pure  contents  of  the  gold  dollar,  which  was 
coined  in  the  United  States  from  1849  to  1890.  It  is  one  tenth  of  the 
weight  of  the  present  eagle. 

2  This  is  the  weight  of  the  pure  contents  of  our  silver  dollar. 

8  This  corresponds  closely  to  the  average  price  <>f  silver  bullion  for 
1895.  The  readers  will  remember  that,  at  any  moment,  the  market  value 
n|'  gold  or  silver  bullion  will  depend  upon  the  supply  of  cither  metal  and 
tlie  demand  for  each  for  money  and  for  use  in  the  arts.  In  the  long  run, 
however,  the  market  value  of  gold  and  siher  bullion  will  depend  upon  the 
marginal  expenses  of  production. 


GRE SEAM'S  LAW.  245 

it  often  happens  that  superior  commodities  drive  in- 
ferior out  of  the  market,  but  with  legal-tender  money 
the  case  is  different.  If  the  law  allows  the  debtor  to 
pay  a  debt  of  ten  dollars  with  ten  silver  dollars  whose 
bullion  value  is  only  one  half  the  bullion  value  of  a 
ten-dollar  gold-piece,  many  debtors  will  make  payment 
with  the  cheaper  money.  As  a  rule,  the  dearer  money 
will  go  out  of  circulation  as  fast  as  cheaper  money  is 
allowed  to  take  its  place.  Even  when  coins  are  not 
actually  declared  legal  tender,  the  force  of  custom,  or 
the  ignorance  of  many  persons  concerning  the  actual 
bullion  value  of  the  coins,  may  serve  to  give  currency 
to  the  inferior  money.  It  will  then  tend  to  displace 
better  money  precisely  as  if  it  had  been  legal  tender. 
Economists  call  this  principle  "  Gresham's  Law,"  after 
Sir  Thomas  Gresham,  who  long  ago  formulated  the 
statement  that  bad  money  tends  to  drive  out  good,  but 
good  money  cannot  drive  out  bad. 

The  operation    of  Gresham's    law  does    not    depend 
necessarily  upon  the  action  of  the  mass  of  the  people 
in  picking  over  various  coins  in  order  to  se-  Manner  in 
lect  the  cheapest  for  the  purpose  of  paying  ^resha^s 
their  debts.     This  is  done  by  money  dealers,  law  operates. 
Goldsmiths    select    the    heaviest    and    most    valuable 
coins  for  the  purpose  of    melting  them  up  into  bullion. 
Bunkers    and  gold    brokers   constantly  pick   over  gold 
money  to  secure   the  heaviest    coins   for  shipments  to 
foreign  countries.     When  American  gold  coins  are  sent 
to  England,  they  pass  as  so  much  gold  bullion.    Bankers 
who  ship  bullion  naturally  select  the  heaviest  coins  for 


246  PRINCIPLES  OF  ECONOMICS. 

paying  foreign  debts,   and   turn  back  into   circulation 

those  that  have  been  worn  lighter  by  longer  use.     So 

with   the   silver   dollars   in   the    case    which   we   have 

assumed.     They  will  be  used  for  paying  domestic  debts, 

while  the  gold  coins,  on  account  of  their  superior  bullion 

value,  will  be  used  in  paying  foreign  debts. 

§  150.    But  there  are  limits  to  the  power  of  inferior 

money  to  drive  out  superior.     If  there  is  a  large  amount 

of  silver  bullion  available  for  coinage  pur- 
Limitations  &      r 

to  the  poses,  and  the  law  allows  any  amount  to  be 

Gresham's       brought  to  the  mints,  a  large   number   of 
law"  silver  dollars  will  be  placed  in  circulation. 

In  the  bullion  market  371.25  grains  of  silver  are  worth 
only  one  half  of  23.22  grains  of  gold ;  but  the  law  gives 
to  the  371.25-grain  silver  dollar  the  same  power  in 
paying  debts  that  the  23.22-grain  gold  dollar  possesses. 
Under  such  circumstances  the  gold  dollars  will  be 
melted  up  for  use  in  the  arts,  or  will  be  shipped  to 
foreign  countries  to  pay  foreign  debts.  If  the  silver 
money  comes  into  circulation  gradually,  the  disappear- 
ance of  gold  will  be  gradual.  But  if  every  one  knows 
that  an  unlimited  amount  of  silver  is  sure  to  be  put  into 
circulation  in  the  near  future,  a  general  scramble  for 
gold  may  ensue.  Many  people  will  hasten  to  get  as 
many  gold  dollars  as  possible  while  the  supply  of  gold 
in  circulation  holds  out,  and  the  disappearance  of  gold 
will  be  rapid.  The  power  of  the  inferior  money  to  dis- 
place the  superior  will  be  limited  by  the  fact  that  the 
country  needs  $60,000  of  money  to  effect  its  exchanges 
at  the  existing  level  of  prices.     If  gold  dollars  disappear 


DEBASED  MONEY.  247 

faster  than  silver  dollars  can  be  coined  and  placed  in 
circulation,  then  the  stock  of  money  will  become  inade- 
quate and  the  value  of  money  will  rise.  This  rise  in 
the  purchasing  power  of  money  will  attract  some  gold 
dollars  back  into  circulation,  and  they  will  remain  in 
use  until  new  silver  dollars  are  ready  to  take  their 
places.  Assuming  that  the  nation's  demand  for  money 
remains  unchanged,  and  that  the  rapidity  with  which 
each  dollar  circulates  is  unaltered,  then  the  gold  coins 
could  not  all  disappear  until  $60,000  of  silver  coins 
should  be  placed  in  circulation.  If  the  government 
should  limit  the  coinage  of  silver  to  $30,000,  then 
$30,000  of  gold  would  disappear  from  circulation,  and 
the  nation's  stock  of  money  would  consist  of  equal 
amounts  of  gold  and  silver.  On  the  other  hand,  if  the 
nation  is  prosperous  and  progressive,  its  demand  for 
money  will  increase  from  year  to  year  as  its  volume  of 
business  increases.  Suppose  it  to  need  each  year  an 
increase  of  $2,000  in  its  money  supply  in  order  to  trans- 
act its  increased  business  at  its  old  level  of  prices. 
Then  two  thousand  silver  dollars  could  be  placed  in  cir- 
culation annually  without  displacing  any  gold  money. 
Finally,  if  any  cause  should  decrease  the  amount  of 
business  transacted  in  any  year,  and  should  decrease  the 
nation's  demand  for  money,  a  certain  amount  of  gold 
would  disappear  from  circulation. 

It  is  important  not  to  overlook  one  possible  result  of 
placing  debased  money  in  circulation.     The  Less  demand 
mere   threat   of   a  debasement  of  the  cur-  formoney- 
rency  may   check   business   activity   and  diminish  the 


248  PRINCIPLES   OF  ECONOMICS. 

amount  of  business  transacted.  Men  will  not  make 
contracts  for  the  future,  and  will  not  be  inclined  to 
invest  capital  freely,  when  they  consider  it  probable 
that  money  will  be  debased.  When  debasement  actu- 
ally occurs,  a  business  panic  is  likely  to  ensue.  This 
greatly  contracts  the  volume  of  business  transacted,  and 
diminishes  the  demand  for  money.  Such  a  lessening  of 
the  demand  for  a  medium  of  exchange  will  enable  the 
cheap  dollars  to  supply  the  entire  demand  for  money 
more  quickly  than  would  be  possible  otherwise. 

§  151.  We  must  consider  now  the  result  of  placing 
the  inferior  silver  coins  in  circulation  side  by  side  with 
Effects  of  the  superior  gold  coins.  If  the  nation's 
debasement,  demand  for  money  remains  unchanged  at 
$60,000,  the  result  of  placing  60,000  of  the  silver  dollars 
in  circulation  will  be  merely  to  drive  the  60,000  gold 
dollars  out  of  circulation.  If  the  coinage  of  silver  dol- 
lars should  be  stopped  at  that  point,  so  that  the  supply 
of  money  would  remain  at  $60,000,  there  would  be  no 
change  in  the  general  level  of  prices.  The  nation's 
stock  of  money  and  its  demand  for  money  would  both 
be  unchanged,  and  general  prices  could  not  be  altered. 
If,  therefore,  the  supply  of  the  cheaper  silver  dollars 
should  be  absolutely  limited  to  $60,000,  the  silver 
money  would  perform  all  the  business  of  the  nation  as 
well  as  the  gold  ;  and  the  purchasing  power  of  371.25 
grains  of  fine  silver  in  a  dollar  would  be  twice  as  great 
as  the  purchasing  power  of  371.25  grains  of  silver  in 
the  form  of  bullion.  But  ibis  would  hold  true,  be  it 
remembered,  solely  upon  the  condition  that  the  coinage 


DEBASED  MONEY.  249 

of  silver  dollars  should  bo  absolutely  limited  to  $60,000. 
As  a  mutter  of  fact,  there  is  very  little  likelihood  that 
the  nation  could  limit  its  coinage  in  this  manner.  Three 
causes  would  in  all  probability  lead  to  an  increase  of 
the  silver  coinage  :  — 

(a)  The  government  could  make  a  large  profit  by 
buying  silver  bullion,  converting  it  into  silver  dollars, 
and  using  these  dollars  to  pay  debts.  Whenever  the 
sovereigns  of  Europe  debased  their  coinages,  this  mo- 
tive almost  always  led  them  to  continue  to  put  debased 
money  into  circulation  long  after  the  demand  had  been 
satisfied. 

(5)  Owners  of  silver  mines  might  continually  urge 
the  government  to  open  its  mints  to  the  free  coinage  of 
silver  dollars,  since  these  mine-owners  could,  at  the 
start,  carry  371.25  grains  of  silver  bullion  to  the  mints, 
and  have  it  coined  into  dollars  which  would  exchange 
for  as  many  commodities  as  742.50  grains  of  silver 
bullion  would  command  in  the  market.  In  the  United 
States  the  owners  of  silver  mines  have  incessantly  urged 
Congress  to  allow  free  coinage  of  the  371.25-grain  silver 
dollar,  and  have  expended  large  sums  of  money  in  fur- 
thering political  agitation  for  the  free  coinage  of  silver. 

(c)  In  all  countries  there  are  many  debtors  who 
would  welcome  the  opportunity  to  pay  off  their  debts 
in  money  which  is  worth  less  than  that  in  which  the 
debts  were  contracted.  If  the  amount  of  money  in  the 
country  should  be  increased  much  beyond  $G0,000,  then 
its  purchasing  power  would  surely  begin  to  decline. 
A.8  money  becomes  less  and  less  valuable  as  compared 


250  PRINCIPLES  OF  ECONOMICS. 

with  commodities,  the  burden  of  all  debts  is  lessened. 
It  is  for  the  apparent  interest  of  debtors,  therefore,  to 
have  the  amount  of  money  as  large  as  possible.  When- 
ever coins  are  given  a  legal-tender  power  greater  than 
their  bullion  value,  then  it  is  easy  to  increase  or  inflate 
the  currency  with  cheap  money.  Human  nature  is 
likely  to  succumb  to  such  a  temptation  as  cheap  money 
holds  out  to  debtors.  In  the  United  States  we  have 
been  cursed  by  an  agitation  in  favor  of  cheap  money  for 
the  last  two  centuries.  Any  one  of  these  three  forces, 
still  more  two  of  them  combined,  would  in  many  cases 
be  sufficient  to  cause  the  passage  of  laws  opening  mints 
to  the  free  coinage  of  the  cheaper  money. 

Let  us  now  trace  the  effect  of  increasing  the  coinage 
of  silver  dollars  beyond  60,000,  the  limit  set  by  the  real 

mjJ  demands  of  trade  at  the  old  level  of  prices. 

Ultimate  r 

results  of  It  is  clear  that,  if  the  number  of  silver  dol- 
lars should  increase  to  70,000  within  the 
space  of  a  year,  the  purchasing  power  of  each  coin 
would  tend  to  decline  ;  since  it  is  not  likely  that  the 
demand  of  any  country  for  money  could  increase  cor- 
respondingly within  a  period  of  twelve  months.  If  the 
number  of  dollars  should  increase  to  80,000,  the  fall  in 
the  value  of  money  would  be  more  rapid,  and  the  rise 
of  prices  would  be  very  marked.  Now  what  limit,  if 
any,  will  there  be  to  the  increase  of  such  a  silver  coin- 
age ?  Manifestly  there  will  be  an  inducement  for  per- 
sons to  carry  silver  to  the  mints  to  be  coined  just  as 
long  as  the  money  value  (that  is,  the  purchasing  power) 
of  the  silver  dollar  remains  greater  than  the  purchasing 


DEBASED  MONEY.  251 

power  of  371.25  grains  of  pure  silver.  When  prices 
rise  so  that  371.25  grains  of  fine  silver  will  purchase  no 
more  commodities  when  coined  into  a  dollar  than  it  will 
purchase  when  in  the  form  of  silver  bullion,  the  coinage 
of  silver  will  cease.  In  other  words,  when  the  purchas- 
ing power  of  a  silver  dollar  falls  to  the  level  of  the  pur- 
chasing power  of  371.25  grains  of  fine  silver  bullion, 
then  there  will  be  no  inducement  for  any  one  to  bring 
any  more  silver  to  the  mints.  This  amounts  merely  to 
saying  that  the  money  value  and  the  bullion  value  of 
silver  will  always  tend  to  be  the  same,  when  people  are 
left  free  to  convert  bullion  into  coin  and  coin  into 
bullion. 

A  final  point  now  demands  attention.  Is  it  not  possi- 
ble that  the  increased  demand  for  silver  as  money,  since 
it  leads   to  the  conversion  of  bullion  into  __ 

The  value  of 

coin,  may  diminish  the  supply  of  silver  silver  bullion, 
bullion  and  raise  its  marginal  utility  ?  Manifestly  such 
a  thing  is  conceivable.  If  the  silver  mines  should  be- 
come exhausted,  or  the  production  of  silver  should  be 
stopped,  then  the  conversion  of  bullion  into  coin  would 
"very  rapidly  raise  the  marginal  utility  of  silver  bullion. 
If  the  marginal  utility  of  the  limited  stock  of  bullion 
should  increase  rapidly,  then  the  fall  in  the  purchasing 
power  of  the  silver  dollar  could  not  be  so  great.  The 
fall  in  the  purchasing  power  of  the  dollar  would  be  met 
sooner  or  later  by  the  rise  in  the  value  of  the  silver 
bullion.  Whenever  this  should  happen,  equality  would 
be  restored  between  the  money  value  and  the  bullion 
value  of  silver.     The  coinage  of  silver  would  then  cease, 


252  PRINCIPLES   OF  ECONOMICS. 

and  prices  would  rise  no  longer.  But,  on  the  other 
hand,  suppose  that  the  production  of  silver  cannot  be 
limited.  Then  the  supply  of  silver  bullion  will  contin- 
ually increase.  If  production  remain  large,  the  mar- 
ginal utility  of  silver  bullion  would  not  be  increased  by 
reason  of  the  demand  for  silver  as  money.  All  would 
depend  upon  whether  the  new  demand  for  silver  as 
money  should  prove  to  be  greater  or  less  than  the  ad- 
ditional supply  of  silver  which  could  be  put  out  of  the 
mines.  This  additional  supply  would  probably  be  pro- 
duced at  a  greater  marginal  expense  from  ores  which 
could  not  be  worked  profitably  when  the  value  of  371.25 
grains  of  bullion  was  only  fifty  cents.  If  the  supply 
could  be  increased  very  largely  with  only  a  slight  in- 
crease of  the  marginal  expense,  then  the  coinage  of  sil- 
ver would  rapidly  become  excessive,  and  the  purchasing 
power  of  each  coin  would  fall  greatly.  If  the  marginal 
expense  of  producing  the  larger  supply  increased  very 
rapidly,  the  supply  of  silver  dollars,  hence  the  deprecia- 
tion of  each  coin,  could  not  be  so  great.  In  any  case, 
the  supply  of  silver  dollars  would  increase  until  the 
decline  in  the  purchasing  power  of  each  coin  should 
make  the  value  of  a  dollar  equal  the  marginal  expenses 
of  production. 

IV.  Inflation  and  Contraction. 

§  152.    The  use  of  debased  coin  opens  the  door  for  a 

sudden  increase,  or  inflation,  of  the  supply 
InflaUon.  _ 

of  money.     When    the    weight   or   fineness 
of   existing  coins  is  arbitrarily  reduced,  it   is    easy  to 


INFLATION  AND   CONTRACTION.  253 

increase  their  number.  When  the  money  consists  of 
gold  alone,  it  is  easy  to  inflate  a  currency  by  giving 
legal-tender  power  to  silver  coins  that  have  a  smaller 
bullion  value  than  the  gold  coins.  Similarly,  if  silver  is 
the  standard  money,  inflation  may  be  produced  by  cir- 
culating legal-tender  gold  coins  which  have  a  smaller 
bullion  value  than  the  silver  coins.  This  was  attempted 
in  the  colony  of  Massachusetts  in  the  last  century.  But 
if,  on  the  other  hand,  only  coins  of  an  equal  bullion 
value  are  allowed  to  serve  as  legal  tender,  inflation  can- 
not take  place  unless  sudden  discoveries  of  gold  and 
silver,  or  improvements  in  the  art  of  mining,  increase 
the  supply  of  money  faster  than  the  needs  of  trade. 
Even  when  this  happens,  a  rise  of  prices  will  increase 
the  expenses  of  mining  the  precious  metals,  and  will 
have  a  tendency  ultimately  to  check  their  production. 
Evidently  the  difficulty  or  the  cost  of  producing  the 
precious  metals  generally  proves  a  bar  to  an  increase  of 
gold  or  silver  money  beyond  the  needs  of  trade.  It  is 
clear  that  any  sudden  rise  of  prices  caused  by  such  a 
rapid  inflation  will  work  injustice  in  the  case  of  all  long- 
term  contracts.  If  prices  suddenly  rise,  debtors  are 
enabled  to  pay  old  debts  in  money  which  will  command 
fewer  commodities  than  that  in  which  the  debts  wore 
contracted.  Such  a  change  in  the  purchasing  power  of 
money  is  unjust  to  the  creditors. 

§  153.    On   the   other  hand,   it   is   possible   for    the 
world's  stock  of  metallic  money   gradually 

_  .  *     Contraction. 

to  decrease.     Each  year  a  certain  amount 

of  coin  and  bullion  is  lost  by  accident  or  by  abrasion 


254  PRINCIPLES  OF  ECONOMICS. 

while  in  use.  Now,  if  the  gold  and  silver  mines  do  not 
furnish  enough  to  make  good  this  loss,  the  supply  of 
bullion  and  of  money  will  gradually  decrease.  Besides 
this,  it  is  possible  that  the  total  amount  of  money  needed 
by  the  civilized  world  increases  in  prosperous  years. 
Now,  if  the  mines  do  not  yield  enough  gold  and  silver  to 
provide  for  this  increased  demand  for  money,  as  well  as 
to  make  good  the  yearly  loss  of  the  precious  metals, 
then  the  supply  of  money  will  undergo  a  relative  de- 
crease. Contraction  of  the  money  supply  may,  there- 
fore, take  place  either  by  an  absolute  decrease  of  the 
stocks  of  gold  and  silver,  or  by  a  failure  of  the  stocks  to 
increase  as  fast  as  the  demand  for  money  and  bullion 
increases.  Now,  a  contraction  of  the  money  supply 
tends  to  lower  all  prices,  and  to  oblige  debtors  to  pay 
long-standing  debts  in  money  which  purchases  more  com- 
modities than  were  commanded  by  the  money  in  which  the 
debts  were  originally  contracted.  This  is  exactly  as  un- 
just as  it  is  to  cheapen  money,  and  to  enable  debtors  to 
pay  debts  with  money  of  inferior  purchasing  power. 

§  154.    We  must  conclude,  therefore,  that  a  sudden 

increase  of  prices  is  unjust  to  creditors,  while  a  sudden 

EvUsof  fall  of  prices  is  unjust  to  the  debtors.     If 

changes  in  the  changes   take   place   slowly,   less   harm    is 

volume  of  °  *  J  ' 

currency.  done  ;  but  it  is  hard  to  see  how  one  party  or 
the  other  can  fail  to  suffer.  Recognizing  this  fact,  some 
persons  have  proposed  to  maintain  without  change  a 
fixed  level  of  prices.  They  have  desired  to  accomplish 
this  by  having  governments  take  steps  to  increase  or 
decrease  the  amount  of  money  in  circulation  whenever 


INFLATION  AND   CONTRACTION.  255 

general  prices  begin  to  fall  or  to  rise.  Another  plan  is 
to  allow  contracts  for  future  payments  to  be  made  in 
units  of  a  tabular  standard  of  value.  This  tabular 
standard  would  be  formed  by  adding  together  the  prices 
of  definite  units  of  as  many  articles  of  common  con- 
sumption as  can  be  secured  for  the  purpose.  Whenever 
the  total  prices  of  these  commodities  should  rise,  the 
money  value  of  long-term  contracts  would  be  increased 
accordingly  ;  and  when  the  tabular  unit  should  fall,  less 
money  would  be  required  to  discharge  such  contracts. 
Both  of  these  plans  present  a  number  of  practical  diffi- 
culties which  make  them  impossible  of  adoption  in  the 
near  future.  There  is  at  present  no  practicable  method 
of  avoiding  the  evil  effects  of  inflation  or  contraction. 
It  is  possible,  however,  to  insist  that  the  supply  of  money 
shall  not  be  increased  or  decreased  in  an  arbitrary  or 
artificial  manner. 

Certain  forces  tend  to  diminish  the  injustice  done  to 
creditors  or  to  debtors  by  changes  in  the  value  of  money. 
It  has  been  shown  that  an  appreciation  of  changes  in 
money  is  partially  offset  by  a  decline  in  the  £^2J£ 
rate  of   interest  in  those  cases  where   the  such  injustice. 
appreciation  is  gradual  and  regular  enough  to  be  fore- 
seen.    On  the  other  hand,  depreciation  of  money  leads 
to  higher  rates  of  interest  in  cases  where  it  can  be  fore- 
seen.    Yet,  when  all  allowance  is  made  for  the  influence 
of  these  changes  in  the  rate  of  interest,  there  remains 
"  a  net  loss  alternating  between  debtors  and  creditors," 
according  to  changes  in  general  prices.1 

1  See  Fisher,  Appreciation  and  Interest,  80. 


256  PRINCIPLES   OF  ECONOMICS. 

It  is  sometimes  said  that  it  makes  no  difference 
whether  the  amount  of  money  in  a  country  is  large  or 
other  con-  small.  If  the  supply  is  large,  prices  are  high, 
siderations.  an(}  \^  takes  more  money  to  exchange  the 
same  commodities ;  while  if  the  supply  is  small,  prices 
are  low,  and  the  same  commodities  are  transferred  by 
means  of  a  smaller  amount  of  money.  There  is  some 
truth  in  this  claim,  provided  that  it  is  remembered  that 
changes  in  the  amount  of  money  are  harmful.  Also,  the 
statement  should  be  qualified  by  noticing  that  a  country 
may  have  so  little  money  that  people  may  be  driven  to 
barter,  and  industries  may  be  greatly  injured.  In  con- 
cluding this  subject,  it  will  be  well  to  consider  certain 
other  effects  of  contraction  and  expansion. 

1.  Contraction  tends  to  depress  productive  industry. 
Most  debts  are  owed  for  capital  borrowed  for  use  in  pro- 
ductive enterprises.  The  managers  of  business  under- 
takings form  a  most  important  part  of  the  debtor  classes. 
Now,  suppose  that  a  producer  borrows  $  10,000  in  order  to 
help  build  a  factory  or  to  buy  a  farm,  and  suppose  next 
that  the  value  of  money  begins  to  increase  on  account  of 
a  contraction  of  the  supply.  Then  prices  will  fall  as  fast 
as  the  value  of  money  rises,  and  the  borrower  will  have 
to  produce  a  much  larger  amount  of  cloth  or  farm  prod- 
uce than  would  be  necessary  otherwise  in  order  to  pay 
the  debt  of  $10,000.  Under  such  circumstances,  which 
are  as  a  matter  of  fact  very  common,  falling  prices  caused 
by  currency  contraction  have  been  well  called  a  millstone 
around  the  neck  of  productive  industry. 

2.  On  the  other  hand,  it   has  been  thought  that  a 


GOVERNMENT  PAPER  MONEY.  257 

gradual  rise  of  prices  tends  not  only  to  lighten  the  burden 
of  debts  owed  by  producers,  but  also  to  encourage  all 
productive  industry.  Higher  prices  mean  more  pros- 
perous times  for  all  producers.  In  this  claim  one  fact 
is  overlooked.  Rising  prices  are  sure  to  stimulate  spec- 
ulation. If  the  rise  is  long  continued,  multitudes  of  new- 
enterprises  will  be  established.  Some  of  these  may  be 
wisely  planned  and  managed,  others  are  sure  to  be  estab- 
lished unwisely.  Many  of  them  will  be  founded  by  means 
of  borrowed  capital,  which  is  easier  to  secure  in  times  of 
prosperity.  These  causes  lead  to  the  establishment  of 
too  many  enterprises  in  some  lines  of  business.  Over- 
production of  such  commodities  will  ensue,  and  the  prices 
of  these  particular  commodities  will  fall  below  a  paying 
point.  Then  comes  failure  and  widespread  business 
disaster,  which  may  not  be  confined  to  the  particular 
industries  where  over-production  occurred.  Such  results 
are  likely  to  come  about  even  when  prices  are  not  raised 
by  means  of  an  expanding  currency.  Inflation  simply 
intensifies  forces  which  are  only  too  likely  to  come  into 
operation  without  such  a  stimulus. 

V.    Government  Paper  Money. 

§  155.  Government  paper  money  consists  usually  of 
pieces  of  paper  upon  which  a  government  prints  its 
promises  to  pay.    Usuallv  no  time  of  pavment 

1  .  Nature  of 

is  specified,  and  the   payment    or   ultimate  government 

redemption  of  such  notes  depends  solely  upon  paper 

the  desire  and  ability  of   the  government   to   keep   its 

promises.     In  a  few  cases  such  paper  has  been  redeemed 


258  PRINCIPLES   OF  ECONOMICS. 

at  its  face  value ;  but  much  oftener  it  has  been  repudiated, 
or  has  been  redeemed  only  in  part.  In  some  cases  gov- 
ernment paper  has  not  borne  upon  its  face  the  promise 
of  the  government  to  pay,  and  has  consisted  simply  of 
pieces  of  paper  that  the  government  has  declared  to  be 
legal  tender  in  the  payment  of  all  debts. 

§  156.    Manifestly  it  is  very  easy  for  a  government  to 

pay  a  debt  by  issuing  paper  promises  to  pay,  and  such  a 

History  of       course  has  often  been  resorted  to.     In  the 

f^rSe  United  states  the  colony  of  Massachusetts 
united  states,  made  an  issue  of  "  bills  of  credit,"  in  the 
year  1690,  for  the  purpose  of  paying  the  expenses  of  a 
disastrous  military  expedition.  Some  years  later  other 
colonies  followed  her  lead,  and  during  the  eighteenth 
century  issues  of  bills  of  credit  were  often  resorted  to  by 
most  of  the  colonies.  In  the  Revolutionary  War,  and 
again  in  the  Civil  War,  similar  issues  were  made  by  the 
United  States.  It  is  evident  that  the  people  of  this 
country  have  had  sufficient  experience  with  such  currency 
to  enable  them  to  learn  from  their  own  history  how  gov- 
ernment paper  actually  works. 

§  157.    The   advocates  of    government   paper  money 

have  advanced  the  following  claims  in  its  favor:  — 

The  arguments     1.    (Government    paper    is    cheaper    than 

government     S0^  or  silver.     By  its  use  a  nation  saves  the 

paper  money,  expense   of    procuring   and    maintaining   a 

stock  of  the  precious  metals.     This  is  certainly  true  so 

far  as  it  goes.     Yet  in  foreign  trade  the  precious  metals 

would  have  to  be  used,  as  one  nation  does  not  accept  the 

legal-tender  paper  issued  by  another. 


GOVERNMENT  PAPER  MONEY.  259 

2.  It  is  said  that  government  paper  may  be  used  as 
a  medium  of  exchange  with  perfect  safety  and  conven- 
ience, so  long  as  means  are  taken  to  prevent  it  from 
being  issued  in  excess  of  the  demands  of  trade.  One 
scheme  to  secure  such  a  limitation  is  to  give  the  holders 
of  such  notes  the  right  to  convert  them  into  government 
bonds  that  bear  interest.  It  is  said  that  so  long  as  the 
notes  are  needed  in  business  they  will  remain  in  circula- 
tion, while  so  soon  as  the  amount  of  government  paper 
becomes  too  great  and  prices  begin  to  rise,  the  note- 
holders will  begin  to  find  it  advantageous  to  exchange 
the  notes  for  government  bonds.  In  this  way  the  issue 
of  paper  could  never  be  excessive.  In  answer  to  this 
claim  we  must  admit  that  such  paper  money  could  keep 
its  value  and  need  not  depreciate  if  the  bars  to  its  over- 
issue  could  be  maintained.  But  this  is  precisely  the 
trouble.  Various  causes,  which  will  be  explained  later, 
make  it  difficult,  if  not  impossible,  to  enforce  any  limita- 
tion upon  the  issues.  It  is  possible  to  say  that,  if  a 
nation  needs  $60,000  of  money  to  effect  its  exchanges, 
then  60,000  paper  dollars  may  be  used,  and  the  general 
level  of  prices  will  remain  at  its  former  figure.  But  if 
it  is  practically  impossible  to  limit  the  paper  to  60,000 
dollars,  then  it  is  idle  to  speculate  about  what  might  be 
if  things  were  only  different  from  what  they  are. 

3.  The  least  intelligent  advocates  of  government 
paper  say  that  any  kind  of  money  depends  for  its  ex- 
istence solely  upon  the  action  of  a  government  in  declar- 
ing it  to  be  legal  tender.  Therefore,  if  a  government 
makes  paper  a  legal  tender,  and  obliges  creditors  to  re- 


260  PRINCIPLES   OF  ECONOMICS. 

ceive  it  in  payment  of  debts,  the  paper  will  be  just  as 
good  money  as  gold  and  silver.  All  money  exists  by 
reason  of  the  "  fiat "  of  the  government ;  hence,  anything 
that  the  law  declares  to  be  money  is  just  as  good  as 
any  other  kind  of  money.  Since  we  have  explained  the 
origin  of  money,  it  is  not  necessary  to  do  more  than 
remind  the  reader  that  this  claim  of  the  "  fiat  money  " 
advocates  is  false  in  every  way.  Gold  and  silver  were 
used  as  money  long  before  legal-tender  laws  were  ever 
thought  of,  and  before  governments  even  thought  of 
coining  money. 

§  158.    It   is  necessary   to  admit   that  paper  money 
might  be  used  for  domestic  exchanges  if  only  its  quan- 
tity   could    be    limited.     But    the    chances 
Objections  to  " 

government  always  are  that  such  limitations  will  not 
be  observed.  The  same  influences  that  lead 
to  an  excessive  coinage  of  cheap  metallic  money  almost 
inevitably  lead  to  an  excessive  issue  of  paper.  First, 
the  needs  of  the  government  are  likely  to  increase,  and 
to  lead  to  increased  issues  of  paper  in  order  to  pay 
public  expenses.  In  almost  every  case  in  our  history 
when  governments  have  issued  paper  in  order  to  pay 
extraordinary  expenses,  they  have  issued  ultimately 
much  more  than  they  originally  intended.  Thus  the 
Continental  Congress  began  by  issuing  $3,000,000  of 
paper  in  the  summer  of  1775,  but  issued  $241,000,000 
before  it  ceased  to  depend  upon  such  means.  Second, 
the  debtor  classes  are  likely  to  favor  a  large  issue  of 
paper  currency,  and  <o  resort  to  political  agitation  in 
order    to   secure   it.     This  is    because  excessive    issues 


GOVERNMENT  PAPER  MONEY.  201 

raise  prices  and  depreciate  the  money.  Depreciated 
money  can  then  be  used  to  pay  old  debts,  and  the 
burden  of  all  debts  can  be  lightened.  In  the  United 
States  we  have  had  repeated  instances  of  such  agitation. 
From  1710  to  1789  the  political  history  of  most  of  the 
colonies  was  blackened  by  the  most  bitter  contests  of 
dishonest  debtors  to  secure  an  abundance  of  cheap 
money.  Elections  often  turned  wholly  upon  this  issue, 
and  the  lower  houses  of  the  colonial  legislatures  were 
often  controlled  by  a  body  of  insolvent  debtors.  Since 
the  Civil  War  we  have  had  another  movement  in  favor 
of  government  issues  of  paper,  and  we  are  still  in  the 
midst  of  an  agitation  in  favor  of  cheap  money.  In  the 
United  States,  as  has  been  shown  by  two  hundred  years 
of  experience,  the  danger  of  an  over-issue  of  government 
paper  would  be  very  great.  Wise  men  will  not  refuse 
to  learn  by  experience. 

Government  paper  money  may  be  viewed  as  a  medium 
of  exchange  whose  bullion  or  commodity  value  is  noth- 
ing but  the  insignificant  value  of  a  piece  of  Fnrtner 
paper,  but  which  is  given  by  act  of  govern-  objections, 
ment  a  considerable  legal-tender  power.  It  will  pre- 
serve its  value  as  a  medium  of  exchange  only  so  long  as 
its  supply  is  limited  according  to  the  demands  of  trade. 
It  has  happened  that  legal-tender  paper,  when  first  put 
into  circulation,  has  caused  no  appreciable  rise  of  prices, 
and  has  circulated  at  a  parity  with  gold  and  silver.  Of 
course  such  paper  drives  an  equal  amount  of  gold  or 
silver  out  of  circulation,  but  specie  may  not  entirely 
disappear  until  there  is  a  sufficient  quantity  of  paper  to 


262  PRINCIPLES  OF  ECONOMICS. 

take  its  place.  It  may  happen,  however,  that  the  pros- 
pect of  unlimited  issues  of  paper  may  cause  a  scramble 
for  specie,  and  may  cause  specie  to  disappear  more 
quickly.  So  soon  as  gold  and  silver  go  out  of  circula- 
tion, the  value  of  government  paper  will  depend  solely 
upon  the  amount  of  it  which  the  government  decides  to 
issue.  As  fast  as  the  paper  increases  beyond  the  needs 
of  business,  prices  begin  to  rise  and  the  paper  depre- 
ciates. Now  there  is  no  limit  to  the  extent  to  which  the 
depreciation  may  go.  Government  paper  has  no  appre- 
ciable cost  of  production.  The  "  bullion  "  or  commodity 
value  is  practically  nothing,  and  the  paper  money  may 
be  issued  until  it  becomes  absolutely  worthless.  When 
the  Continental  Congress  ceased  issuing  bills  of  credit, 
the  notes  were  worth  less  than  three  cents  on  the  dollar. 
It  is  important  to  note,  also,  that  this  depreciation  is  in- 
dependent of  any  desire  or  ability  of  the  government  to 
redeem  the  paper  ultimately  in  gold  or  silver.  Even  if 
redemption  at  a  future  date  were  absolutely  certain,  the 
paper  would  depreciate  as  soon  as  it  should  be  issued 
in  excess  of  the  demands  of  trade.  There  is,  therefore, 
no  limit  to  the  extent  to  which  a  paper  currency  may 
be  inflated. 

§  159.   Asa  general  thing,  government  paper  money 
is  not  immediately  convertible  into  coin.     The  govern- 
ment may  promise  to  pay  gold  or  silver  in 
government     redemption  of  the  notes,  but  the  fulfillment 
of  this  promise  is  almost  always  postponed 
for  a  considerable  time.     Thus  the  United  States  issued 
legal-tender  notes  in  1862,  and  did  not  begin  to  redeem 


LITERATURE.  263 

them  until  1879.  The  notes  were  inconvertible  for  all 
this  period.  Since  1879  the  United  States  has  main- 
tained in  the  Treasury  a  stock,  or  reserve,  of  gold,  with 
which  it  has  been  ready  to  redeem  the  United  States 
notes,  or  "  greenbacks,"  whenever  they  have  been  pre- 
sented. The  present  "  greenbacks "  are  immediately 
convertible  into  coin  upon  demand  of  the  holder,  and 
so  differ  very  materially  from  government  paper  money 
of  the  usual  type. 


LITERATURE   ON   CHAPTER  VIII. 

General  References  :  Andrews,  Institutes  of  Economics,  118— 
157;  Ely,  Outlines  of  Economics,  140-165;  Gide,  Political  Econ- 
omy, 186-235,  272-310;  Hadley,  Economics,  180-263;  Jevons, 
Money  and  the  Mechanism  of  Exchange;  Macvane,  Political 
Economy,  122-192;  Mill,  Principles  of  Political  Economy,  Bk.  III. 
Chaps.  7-20;  Nicholson,  Money  and  Monetary  Problems;  Ros- 
cher,  Political  Economy,  Bk.  IT. ;  Walker,  Political  Economy, 
120-170,  433-174,  Money;  White,  Money  and  Banking;  Report 
of  the  Monetary  Commission  of  the  Indianapolis  Convention, 
77-137,  389-490 ;  Nicholson,  Principles  of  Political  Economy, 
II.  88-214. 


264  PRINCIPLES   OF  ECONOMICS 


CHAPTER  IX. 

MONEY   AND    CREDIT. 

I.   Credit  and  Instruments  of  Credit. 

§  160.  Hitherto  it  has  been  assumed  that  money  is 
actually  used  in  effecting  every  exchange,  and  that  no 
Definition  other  method  exists  by  which  commodities 
of  credit.  or  services  are  transferred.  But  the  com- 
mercial world  uses  credit  as  an  instrument  for  carrying 
on  a  large  part  of  its  exchanges.  Credit  may  be  de- 
fined as  the  power  to  secure  commodities  or  services  at 
the  present  time  in  return  for  some  equivalent  promised 
at  a  future  time.  Any  credit  transaction  involves,  of 
course,  a  certain  amount  of  confidence  in  the  ability  of 
the  debtor  to  make  the  future  payment.  Whenever  a 
person  can  convince  others  that  he  is  able  to  make  such 
future  payments,  he  is  said  to  have  credit. 

§  161.    In   most  credit   transactions,  the  creditor  is 

careful  to  secure  some  written  instrument  which  will 

instruments     serve  as  evidence  or  proof  of  the  obligation 

aySSt         °*  tnc  debtor  to  mal<c  f"turc  payment.     A 

credits.  very  common  credit  transaction  is  seen  in 

the  caso  of  book  credits.     Commodities  or  services  are 

sold,  and  (lie  amounts  due  arc  charged  to  the  buyers  in 


CREDIT.  265 

the  account  books  of  the  sellers.  A  may  buy  supplies 
to  the  amount  of  -$200  from  B,  and  B  may  buy  farm 
produce  to  the  amount  of  $150  from  A.  Then  at  the 
end  of  the  season  A  can  simply  pay  B  $50,  and  ex- 
changes to  the  amount  of  $350  will  be  settled  by  the 
payment  of  $50  in  actual  money. 

§  162.  A  promissory  note  is  a  written  promise  to  pay 
upon  demand,  or  at  some  specified  time.  Such  a  note 
may  serve  as  a  means  of  payment  in  several  (2)  promig. 
transactions.  The  payee,  or  holder  of  the  sory notes, 
note,  may,  by  writing  an  order  on  the  back  and  signing 
his  name,  make  the  note  payable  to  a  third  person.  By 
indorsing  the  note  in  this  manner,  any  holder  may  use 
it  as  a  means  of  paying  his  debts.  When  the  final 
holder  presents  it  for  payment,  it  may  have  effected  a 
number  of  exchanges. 

§  163.  "  A  check  is  an  order  drawn  by  an  individual 
or  company  upon  a  bank  ordering  the  payment  of  a  cer- 
tain sum  of  money  to  the  order  of  a  person 
named,  or  to  the  bearer  of  the  check."  A 
check  can  be  drawn  only  against  a  deposit  of  money  in 
the  bank,  or  against  a  credit  previously  agreed  to  by  the 
banker.  Now  let  us  assume  that  A  owes  B  fifty  dollars, 
that  B  owes  C  fifty  dollars,  and  that  C  owes  D  fifty  dol- 
lars. Assume  also  that  the  four  men  have  deposits  at 
the  same  bank.  Then  A,  B,  and  C  may  draw  checks  for 
fifty  dollars  payable  to  B,  C,  and  D,  respectively.  In 
due  time  B,  C,  and  D  will  deposit  at  the  bank  the  checks 
received  from  A,  B,  and  C,-  respectively.  Then  the 
banker  will  deduct  from  the  deposits  <>f  A,  B,  and  0  the 


2G6  PRINCIPLES   OF  ECONOMICS. 

amounts  of  the  checks  drawn  by  them,  while  he  will 
credit  B,  C,  and  D  with  the  amounts  of  the  checks  which 
they  present.  The  net  result  will  be  that  the  deposit  of 
A  will  be  decreased  by  fifty  dollars,  the  deposits  of  B 
and  C  will  remain  the  same,  while  the  deposit  of  D  will 
be  increased  by  fifty  dollars.  In  this  way  the  three 
debts  may  be  paid  without  the  actual  use  of  any  money. 
Now,  if  the  four  men  have  accounts  with  different  banks 
in  the  same  city,  the  banks  will  settle  their  accounts 
with  each  other  through  a  clearing  house.  The  cus- 
tomers of  each  bank  deposit  with  it  all  checks  received 
by  them,  and  they  are  credited  with  the  amounts  of 
money  represented  by  such  checks.  Then  each  bank 
takes  to  the  clearing  house  all  of  these  checks  which 
are  drawn  upon  other  banks.  At  the  clearing  house  it 
will  find  that  other  banks  have  received  checks  drawn 
upon  itself.  If  a  bank  sends  to  the  clearing  house  checks 
to  the  amount  of  $  10,000,  while  it  finds  there  checks 
drawn  against  itself  to  the  amount  of  $12,000,  the  bank 
will  be  indebted  to  the  clearing  house  for  $2,000,  which 
balance  it  will  have  to  pay  in  money.  On  the  other 
hand,  if  the  checks  drawn  upon  this*  bank  had  amounted 
to  $8,000,  the  bank  would  have  received  the  balance 
of  $2,000  from  the  clearing  house.  In  this  manner 
different  banks  very  conveniently  settle  all  their  mutual 
obligations  by  merely  paying  the  balances  against  them, 
or  receiving  balances  due  them,  at  the  clearing  house. 
Banks  located  in  different  places  settle  their  accounts 
with  almost  equal  ease.  Banks  in  country  districts  have 
agents,  or  corresponding  banks,  in  the  nearest  clearing 


CREDIT. 


267 


/nuse  city,  so  that  every  clearing  house  performs  this 
work  of  settling  accounts  for  the  banks  of  the  adjacent 
territory.  Then  the  New  York  clearing  house  acts  as  a 
central  clearing  house  for  the  banks  of  the  entire  coun- 
try, since  every  important  city  bank  corresponds  with 
some  New  York  bank  that  is  a  member  of  the  clearing 
house.  In  1895  the  total  transactions  of  the  clearing 
houses  of  the  country  amounted  to  $ 51, 11 1,591 ,928. 
The  New  York  clearing  house  effected  $28,264,379,126 
of  these  transactions.  The  following  diagram,  taken 
from  President  Andrews'  "  Institutes  of  Economics," 
page  152,  illustrates  the  operations  of  a  national  clear- 
ing system :  — 


Providence  New  Orleans 

ABC     DEP     GUI     JKL 


Chicago  San  Francisco 

MNO     PQR     STUVWX 


1st  Nat'l    2d  Nat'l    3d  Nat'l    4th  Nat'l    5th  Nat'l    6th  Nat'l    7th  Nat'l     8th  Nat'l 
Bank  Bank  Bank  Bank  Bank  Bank  Bank  Bank 


Metropolitan 


New  York  Clearing  House  Banks 
Chemical  Stuyvesant  Manufacturers 


New  York 
Clearing  House 


§  164.  A  bill  of  exchange,  or  draft,  is  a  written  order 
by  which  the  person  who  draws  the  bill  orders  a  second 
person,  the  drawee,  to  pay  a  specified    sum  of   money 


268  PRINCIPLES   OF  ECONOMICS. 

to  a  third  person.     Such  bills  may  be  payable  at  sight 

or   after   a  specified  time.     They  are  made  payable  to 

a  specified  person,  but  by  indorsement  may 

(4)  Bills  of  f  K  5  J  J 

exchange  and  be  transferred  to  other  persons.  When  this 
is  done,  a  single  bill  may  serve  to  pay  sev- 
eral debts  before  the  drawee  is  called  upon  to  make 
final  payment.  Bankers  are  willing  to  buy  bills  of  ex- 
change drawn  by  responsible  persons  upon  their  debtors. 
Also,  they  are  willing  to  sell  drafts  to  persons  who  wish 
to  make  payments  in  distant  places.  These  drafts  the 
bankers  draw  upon  the  banks  with  which  they  corre- 
spond in  distant  cities.  Then  the  bills  of  exchange  and 
the  drafts  bought  and  sold  in  one  city  may  be  set  off 
against  bills  and  drafts  bought  and  sold  by  correspond- 
ing banks  in  other  cities.  Money  need  be  sent  from  one 
city  to  the  other  only  when  the  obligations  incurred  by 
one  bank  exceed  the  obligations  incurred  by  its  corre- 
sponding banks.  Even  then  only  the  balances  need  be 
paid  by  forwarding  money. 

Foreign  bills  of  exchange  require  special  explanation. 
Private  banking-houses  having  branches  in  several  coun- 
Foreignbms  tries  ma^c  a  business  of  dealing  in  foreign 
of  exchange,  exchange.  Such  bankers  are  sometimes 
called  exchange  brokers.  A  person  who  wishes  to  make 
any  payment  in  a  foreign  country  can  procure  from  an 
exchange  broker  a  draft  on  that  country.  Men  who 
wish  to  invest  capital  in  a  foreign  country,  to  pay  for 
goods  bought  from  foreign  merchants,  or  to  travel 
abroad,  can  purchase  such  drafts  with  which  to  make 
the   necessary    payments.     Again,   any   merchant   who 


CREDIT.  2GP 

ft 
sells  goods  to  a  foreign  customer  can  draw  a  bill   of 

exchange  upon  that  customer,  and  sell  it  to  an  ex- 
change broker.  Thus  it  happens  that  brokers  find  a 
constant  demand  for  drafts  upon  other  countries,  and 
a  constant  supply  of  bills  of  exchange  offered  for  sale. 

Now,  suppose  that  the  New  York  branch  of  a  firm  of 
exchange  brokers  sells  drafts  on  London  to  the  amount 
of  $100,000  during  a  week,  while  it  buys  Settlement  of 

bills  of  exchange  drawn  on  London  to  the  foreign  ex- 
changes with- 
amount  of  $200,000.     Then  it  will  owe  the  out  the  use 

London   branch   of   the    firm   $100,000   for  ofmoney- 

the  drafts,  and  will  have  $200,000  owed  to  it  by  the 

London  branch  after  the  bills  of  exchange  have  been 

presented  to  the  English  merchants  for  payment.     One 

of  these  accounts  can  be  used  to  offset  the  other,  and  the 

accounts  of  the  two  branches  with  each  other  can  be 

settled  if  the  London  branch  merely  sends  $100,000  in 

money  to  New  York.     But  probably  this  will  not  be. 

necessary.     During  the  same  week  the  London  branch 

of  the  firm  may  sell  drafts  and  buy  bills  on  New  York 

in  such  an  amount  that  a  balance  of  $100,000  will  be 

owed  by  the  New  York  branch.     One  of  these  balances 

will  offset  the  other,  so  that  all  the  transactions  may  be 

settled  without  the  actual  payment  of  any  money. 

But  now  suppose  that  the  course  of  business  is  such 

that  many  Americans  are  called  upon  to   make  large 

payments   to   English   creditors,  while  few 

.  ;  Money  may  be 

Englishmen  arc  owing  money   in  America,   needed  to  set- 
Then  it   will  happen  that   the    New    York 
branch    will   be    constantlv    selling;   drafts    on    London. 


270  PRINCIPLES  OF  ECONOMICS. 

while  few  bills  of  exchange  on  London  are  offered  to  it. 
Also  the  London  branch  will  be  selling  few  drafts  on 
New  York,  but  will  be  buying  many  bills  of  exchange 
drawn  by  English  merchants  on  American  customers. 
The  result  of  such  a  condition  of  business  will  be  that 
the  American  branch  will  owe  each  week  a  considerable 
balance  to  the  London  branch.  The  managers  of  the 
two  branches  may  believe  that  in  two  or  three  months 
the  course  of  business  may  turn  the  other  way,  so  that 
they  will  let  the  accounts  run  until  a  turn  in  the  ex- 
changes causes  them  to  balance  again.  In  this  manner 
the  expense  of  shipping  money  will  be  avoided.  But 
during  the  time  that  the  balances  are  running  against 
the  New  York  branch,  the  price  of  drafts  on  London 
will  be  raised,  while  bills  of  exchange  drawn  on  London 
will  command  a  premium.  This  is  because  the  many 
drafts  on  London  sold  by  the  New  York  branch  cause 
an  excessive  drain  on  the  ready  money  of  the  London 
branch,  while  the  few  bills  of  exchange  drawn  in  New 
York  upon  London  debtors  are  insufficient  to  replenish 
this  money  supply.  The  increased  charge  for  drafts  in 
New  York  tends  to  decrease  the  demand,  while  it  com- 
pensates for  the  additional  trouble  to  which  the  firm  is 
put  to  make  payments  in  London.  On  the  other  hand, 
the  premium  paid  for  bills  drawn  on  London  tends  to 
increase  the  supply  offered,  and  to  furnish  the  money 
that  is  needed  in  London. 
The  rate  of  Now,  there  arc  limits  to  the  extent  to  which 
exchange.  ^IC  prjcc  for  drafts  c;in  be  raised,  and  also 
limits  to  the  amount  of  the  premium  which  the  brokers 


CREDIT.  271 

can  afford  to  pay  for  bills  of  exchange.  The  English 
pound  sterling  is  equal  to  14.866  of  our  money,  and  the 
expense  of  paying  freight  and  insurance  on  a  corre- 
sponding shipment  of  gold  across  the  Atlantic,  amounts 
to  about  two  and  one  half  cents.  Now,  exchange  brokers 
could  not  charge  much  more  than  $-4,866  -f-  $.025  for 
drafts  of  a  pound  sterling  on  London ;  otherwise  the 
people  who  desire  to  make  payments  there  would  find  it 
cheaper  to  send  gold  than  to  buy  "exchange,"  that  is,  to 
buy  drafts.  Similarly  the  brokers  would  not  pay  much 
more  than  $4.89  for  each  bill  of  exchange  on  London  for 
the  sum  of  a  pound  sterling,  because  it  would  be  cheaper 
to  ship  gold  from  New  York  to  the  London  branch. 

Conversely,  let  us  suppose  that  business  conditions 
are  such  as  to  make  the  demand  in  England  for  ex- 
change on  New  York  much  greater  than  the 

AnnthfiT*  C21SC. 

demand  in  New  York  for  exchange  on  Lon- 
don. Then  the  New  York  branch  would  find  that  the 
London  branch  was  selling  many  drafts  which  were 
being  presented  in  New  York  for  payment,  while  few 
bills  of  exchange  were  being  drawn  by  London  mer- 
chants and  sent  to  New  York  for  collection.  Also  there 
would  be  little  demand  in  New  York  for  drafts  on 
London,  but  many  bills  of  exchange  on  London  would 
be  offered  for  sale.  Then  the  managers  of  the  New 
York  branch  would  sell  drafts  on  London  for  two  or 
three  cents  less  than  $4,866  for  each  pound  sterling, 
since  this  would  be  a  cheaper  method  of  replenishing 
the  money  of  that  branch  than  the  actual  shipment  of 
gold   from   London   to   New   York.     Furthermore,   the 


Z(V 


PRINCIPLES  OF  ECONOMICS. 


price  at  which  the  New  York  branch  would  buy  bills  of 
exchange  on  London  would  be  less  than  $4,866.  The 
excessive  supply  of  such  bills  offered  for  sale  by  Ameri- 
can creditors  would  depress  their  market  value.  The 
price  could  not  fall  more  than  three  cents  below  $4,866, 
since  it  would  then  be  cheaper  for  American  creditors 
to  instruct  their  English  debtors  to  make  their  payments 
by  sending  gold.  In  these  ways  the  prices  at  which  bills 
of  exchange  sell  in  New  York,  and  the  prices  at  which 
drafts  on  London  can  be  bought  will  depend  upon  the 
state  of  the  exchanges  between  the  two  points.  The 
cost  of  shipping  gold  will  always  determine  the  extreme 
limits  within  which  exchange  will  fluctuate.  But  by 
means  of  drafts  and  bills  of  exchange,  actual  shipments 
of  gold  will  be  avoided  in  most  cases  ;  so  that  the  great 
mass  of  foreign  transactions  will  be  settled  without  the 
use  of  money.  It  will  be  well  to  add  here  that  the  same 
principles  which  apply  to  foreign  exchanges  apply  to 
domestic  exchanges. 

§  165.    Bank  notes  are  another  form  of  instruments 
of  credit,  and  serve  to  lessen  the  amount  of  metallic 
(5)  Bank         money  used  in  effecting  exchanges.    A  bank 
notes.  no£e  jg  sjnip]v  a  promissory  note  issued  by 

a  bank,  and  is  supposed  to  be  payable  at  the  demand  of 
any  holder.  When  banks  redeem  such  notes  promptly, 
bank  notes  circulate  readily  from  one  person  to  another 
in  payment  of  debts.  Then  they  lessen  the  demand  for 
metallic  money.  But  we  shall  have  to  notice  that  a 
bank  cannot  issue  such  notes  safely  without  maintaining 
a  certain  "  reserve  "  of  specie. 


CREDIT.  273 

II.  Banks  as  Institutions  of  Credit. 

§  166=    A  bank  has  been  defined  tersely  as  "  a  manu- 
factory of  credit  and   a  machine  of  exchange."     It  is 
important  to  have   some  knowledge  of  the    The  bank, 
manner  in  which  a  bank  carries  out  its  functions  as  an 
institution  of  credit. 

§  167.  Historically  the  earliest  function  exercised  by 
banking  institutions  was  that  of  receiving  for  safe  keep~ 
ing  deposits  of  money  and  bullion.  In  almost  The  deposit 
all  times  such  institutions  have  existed.  function- 
Modern  banking  did  not  originate  distinctly  in  the  estab- 
lishment of  banks  of  deposit,  but  all  modern  banks 
exercise  the  deposit  function.  Bankers  receive  deposits, 
and  hold  them  subject  to  the  demands  of  the  depositors. 
Originally  they  were  paid  for  keeping  such  money  in  a 
place  of  security  ;  now  they  make  a  profit  by  investing 
the  money,  in  some  cases  even  paying  interest  to  deposi- 
tors. This  change  has  taken  place  on  account  of  the 
exercise  by  banks  of  the  function  of  discount. 

§  168.  The  principal  form  in  which  banks  lend  money 
at  the  present  day  is  the  form  of  discount.  In  bank 
discount  the  bank  deducts  interest  on  its  The  discount 
loans  at  the  time  the  money  is  borrowed,  function. 
Money  lenders  have,  of  course,  existed  in  all  times  and 
places ;  but  banking  institutions,  because  they  com- 
bine the  functions  of  deposit  and  discount,  became  the 
principal  money  lenders  of  the  modern  world.  They 
received  surplus  money  for  safe  keeping  ;  and  so  easily 
utilized  the  idle  moneys  of  a  community  by  loaning  them 


274  PRINCIPLES  OF  ECONOMICS. 

to  persons  who  desired  to  borrow.  Depositors  could  not 
object  to  having  a  banker  lend  part  of  their  deposits  to 
responsible  persons,  so  long  as  he  managed  the  transac- 
tion in  such  a  way  as  to  be  able  to  meet  all  their  demands. 
By  utilizing  deposits  in  this  manner,  bankers  could 
afford  to  receive  deposits  without  charge  for  keeping 
them  in  safety,  and  in  some  cases  could  offer  interest 
as  an  inducement  for  people  to  deposit  money,  which 
could  be  loaned  at  a  higher  rate  of  interest. 

§  169.   In  combining  the  functions  of  deposit  and  dis- 
count the  bank  becomes  distinctively  a  "  manufactory  of 
credit."     Suppose  a  banker  to  start  in  busi- 

IUustration 

of  banking  ness  with  a  capital  of  $o0,000,  and  suppose 
that  he  receives  deposits  from  two  hundred 
customers.  His  capital  serves  as  a  guarantee  for  the 
safety  of  these  deposits.  Now,  some  of  the  depositors 
will  continually  draw  out  a  portion  of  their  deposits, 
while  others  will  increase  theirs.  As  a  result,  the  banker 
finds  that  he  has  usually  about  $100,000  left  in  his 
keeping.  He  concludes  that  his  customers  have  about 
that  amount  of  idle  capital  which  they  will  prefer  to 
leave  on  deposit  as  long  as  they  have  confidence  in  his 
honesty  and  business  ability.  He  concludes  that,  since 
he  always  has  on  his  hands  about  $100,000  of  deposits, 
and  $50,000  of  his  own  capital,  he  can  safely  lend  the 
larger  part  of  these  sums  to  reliable  persons  who  can 
furnish  adequate  security.  Now,  the  persons  who  bor- 
row money  may  prefer  to  leave  the  money  borrowed  on 
deposit  with  the  banker,  subject  to  their  drafts  by  check. 
If  this  occurs,  a  bank  creates  a  deposit  when  it  makes  a 


BANKS.  275 

loan.     The  deposits  in  banks   regularly  increase  when 
their  loans  and  discounts  are  increased,  and  vice-versa. 

After  receiving  1100,000  of  deposits,  the  Detailed 
accounts  of  the  banker  would  be  as  follows  :     operations. 


Liabilities. 

Capital  .     .     .     $50,000 
Deposits     .    .    100,000 

Resources. 
Cash      .    .    .    $150,000 

$150,000  $150,000 

Now  suppose  that  the  banker  lends  to  fifty  customers 
$100,000  for  ninety  days  at  six  per  cent  interest.  Then 
he  will  deduct  $1,500  for  interest,  and  credit  the  bor- 
rowers with  deposits  to  the  amount  of  $98,500.  His 
account  will  now  stand  as  follows  :  — 

Liabilities.  Resources. 

Capital.    .    .    .    $50,000        Cash $150,000 

Deposits     .    .    .     198,500        Loans  and  discounts  .      100,000 
Profits   ....        1,600 

$250,000  $250,000 

Suppose  next  that  various  depositors  draw  out 
$50,000.  Then  the  accounts  of  the  bank  will  stand  as 
follows :  — 

Resources. 

Cash $100,000 

Loans  and  discounts  .       100,000 


Liabilities. 

Capital  .... 

$50,000 

Deposits    .     .     . 

148,500 

Profits    .... 

1,500 

$200,000  $200,000 

Now  the   banker   may    conclude   that  he  can  safely 
increase  his  discounts  by  $80,000.     If  he  lends  $80,000 


276  PRINCIPLES   OF  ECONOMICS. 

for  ninety  days  at  six  per  cent  interest,  and  the  bor- 
rowers draw  out  only  half  of  the  $78,800  with  which 
they  are  credited  after  $1,200  has  been  deducted  for 
interest,  the  accounts  of  the  bank  will  stand  as  follows  : 

Liabilities.  Resources. 

Capital  ....    $50,000        Cash $60,600 

Deposits     .     .     .     187,900        Loans  and  discounts     .     180,000 
Profits    ....        2,700 


$240,600  $240,600 

■ 

We  may  summarize  these  transactions  in  a  few  words. 
The  banker  used  the  $100,000  originally  left  on  deposit 
with  him,  and  the  $50,000  which  he  had  for  his  original 
capital,  as  a  reserve  on  the  basis  of  which  he  incurred 
liabilities  for  $177,300  advanced  to  borrowers  in  the 
form  of  loans  and  discounts.  He  now  owes  deposi- 
tors $187,900,  and  has  a  cash  reserve  of  only  $60,000. 
Manifestly,  if  all  of  his  depositors  should  demand  pay- 
ment at  once,  he  would  have  to  fail.  On  the  other  hand, 
at  the  end  of  ninety  days  he  will  receive  $180,000  in 
payment  of  the  notes  that  he  has  discounted.  He  will 
then  be  able  to  pay  his  depositors  in  full,  besides  having 
back  his  capital  of  $50,000  and  profits  of  $2,700  from 
his  business.  How  is  he  able  to  keep  his  depositors  from 
demanding  all  their  deposits  atone  time?  Simply  by 
using  his  credit  carefully.  He  is  careful  to  ascertain 
just  how  much  money  his  customers  prefer  to  leave  con- 
tinually on  deposit  with  him,  he  confines  his  loans  and 
discounts  within  the  limits  set  by  the  probable  demands 
of  his  depositors,  and  he  lends  money  only  to  responsible 


BANKS.  277 

persons  who  can  furnish  adequate  security.  Long  expe- 
rience has  shown  that  a  reserve  of  from  fifteen  to  twenty- 
five  per  cent  of  the  deposits  is  suflicient  to  meet  all 
demands  which  depositors  are  likely  to  make  at  one 
time. 

§  170.  Deposit  and  discount  are  the  general  and 
necessary  functions  which  an  institution  must  exercise 
in  order  to  be  a  bank.     But  banking  institu- 

°  Other  func- 

tions  perform  a  number  of  other  functions  tions.  wote- 
of  which  we  shall  discuss  one  only.  In  some 
countries  banks  have  had  the  privilege  of  issuing  bank 
notes.  We  have  seen  that  these  are  simply  the  banks' 
promises  to  pay  money  on  the  demand  of  the  holders. 
It  remains  to  show  that  they  are  exactly  similar  to  bank 
deposits  so  far  as  they  affect  the  financial  condition  of 
the  bank.  If,  in  the  case  we  have  supposed,  the  banker 
had  paid  out  $20,000  of  his  notes  to  his  depositors  when 
they  demanded  money,  he  would  have  avoided  paying 
out  $20,000  of  cash  ;  and  would  have  incurred  liabilities 
of  $20,000  for  the  notes  outstanding.  Then  his  accounts 
would  have  stood  as  follows  :  — 

Liabilities.  Resources. 

Capital  ....     $50,000        Cash $80,600 

Deposits     .     .     .     187,900        Loans  and  discounts     .     180,000 
Notes  outstanding    20,000 
Profits    ....        2,700 


$260,600  $260,600 

If  bank  notes  are  to  be  kept  strictly  convertible  into 
coin  at  the  demand  of  the  holder,  it  is  necessary  at  the 
very  least  that  banks  should  keep  on  hand  a  reserve  of 


j 

278  PRINCIPLES   OF  ECONOMICS. 

money  adequate  to  redeem  all  notes  presented  for  re- 
demption. In  this  country  much  stricter  measures  have 
been  taken. 

III.  Advantages  and  Disadvantages  of  Credit. 

§  171.    Credit   has   many   advantages,   of  which   the 
Advantages  of  following  are  the  most  important :  — 
credit-  1.   It  economizes  the  supply  of  gold  and 

silver.  Probably  one  half  of  the  exchanges  of  modern 
civilized  nations  is  carried  on  through  the  means  of 
instruments  of  credit.  Moreover,  payments  of  large 
sums  of  money  and  payments  between  distant  places 
could  not  be  made  conveniently  in  any  other  way. 

2.  Credit  enables  small  sums  of  money  to  be  accu- 
mulated by  banks,  and  the  large  capitals  thus  gathered 
to  be  used  in  productive  industry. 

3.  Credit  tends  to  place  the  capital  of  a  community 
at  the  disposal  of  men  who  are  able  to  employ  it  most 
productively.  Under  normal  conditions  the  man  who  can 
employ  capital  most  efficiently  is  the  man  who  can  afford 
to  pay  the  highest  rates  of  interest,  —  the  man,  therefore, 
who  will  probably  be  best  able  to  secure  loans. 

§  172.  On  the  other  hand,  credit  has  certain  disad- 
vantages. 

1.    It  leads  to  indebtedness  on  the  part  of  the  poor 

for  the  necessities  of  life,  and  often  encourages  extrava- 

Disadvantages  gancc  in  consumption.     When  money  is  bor- 

of  credit.         rowed  for  purposes  of  personal  consumption, 

and  not  for  productive  enterprises,  credit   may  be-  an 

evil. 


DISTRIBUTION  OF   THE  PRECIOUS  METALS.      279 

2.  It  enables  doubtful  enterprises  to  be  established 
with  borrowed  money.  This  has  been  particularly  true 
ill  the  case  of  railroads.  Rascally  or  incompetent  man- 
agers of  such  enterprises  borrow  money  with  too  much 
ease  from  people  who  know  very  little  about  their 
investments. 

3.  Credit  promotes  speculation,  and  sometimes  leads 
to  a  too  rapid  growth  of  certain  lines  of  industry.  When 
this  happens,  a  business  panic  may  be  caused  through  the 
failure  of  such  speculative  enterprises. 

IV.  Territorial  Distribution  of  the  Precious  Metals. 

§  173.    We  have  seen  that  gold  and  silver,  the  money 
metals,  are  in  general  demand  the  world  over.     Gold  and 
silver  bullion  may  be  sold  in  all  countries  as  General 
useful  commodities  ;  while  either  gold  coins  ^^^^ 
or  silver  coins,  and  sometimes  both,  can  be  metals, 
used  in  paying  for  purchased  commodities.    As  a  medium 
for  the  payment  of  debts,  gold  has  been  given  decided 
preference  by  the  commercial  world  within  recent  years  ; 
but    silver    is   still    in    general    demand    as   a   useful 
commodity. 

§  174.  Whenever,  for  any  reason,  the  supply  of  the 
money  metals  increases  in  any  region,  the  coinage  of 
money  will  increase  and  the  money  supply  Gold  and  sllver 
will  become  larger.     This  must  happen  be-  distributed 

.  .  .  through 

cause,  otherwise,  the   increasing   supply  of  changes  in 
bullion  would  lower  the  value  of  each  unit  prices' 
below  the  value  of  coins  containing;  the  same  amount  of 


280  PRINCIPLES   OF  ECONOMICS. 

gold  and  silver,  something  which  cannot  take  place  so 
long  as  people  are  allowed  to  take  bullion  to  the  mints 
for  coinage.  Now,  as  the  increased  supplies  of  gold  and 
silver  get  into  circulation  as  money,  prices  will  tend  to 
rise.  When  such  a  rise  takes  place,  more  commodities 
will  be  imported  from  other  countries  for  sale  at  the 
higher  level  of  prices.  On  the  other  hand  exports  will 
begin  to  decrease,  because  rising  prices  will  increase  the 
money  cost  of  production  and  will  prevent  some  ex- 
porters from  competing  in  foreign  markets.  Hence  the 
rise  of  prices  will  increase  imports  and  decrease  exports, 
until  finally  imports  exceed  exports  very  greatly.  Then 
the  large  excess  of  imports  cannot  be  paid  for  by  bills  of 
exchange  drawn  against  sales  of  exports  ;  but  payment 
must  be  made  by  exporting  gold  or  silver,  as  the  case 
may  be.  This  exportation  of  gold  or  silver  cannot  con- 
tinue indefinitely.  As  the  supply  of  precious  metals 
begins  to  decrease  on  account  of  continued  exportation, 
prices  will  begin  to  fall.  Such  a  fall  in  prices  will  cut 
off  imports  and  increase  exports,  until  the  former  no 
longer  exceed  the  latter.  Then  the  drain  of  gold  and 
silver  will  cease  automatically.  It  is  clear,  then,  that 
high  prices  tend  to  lead  to  exportation  of  gold  and  sil- 
ver, while  low  prices  tend  to  check  such  exportation  of 
the  precious  metals.  If  prices  fall  far  enough,  exports 
will  be  greatly  increased,  imports  will  be  greatly  de- 
creased, and  gold  and  silver  will  flow  into  the  country 
to  pay  for  the  excess  of  exports  sold  to  foreigners.  It 
appears,  therefore,  that  money  lends  automatically  to 
move  away  from  any  region  where  it  becomes  cheap  on 


DISTRIBUTION  OF  THE  PRECIOUS  METALS.      281 

account  of  high    prices,  and    to   move    toward    regions 
where  it  is  dearer  on  account  of  lower  prices. 

§  175.  Since  the  precious  metals  tend  to  flow  away 
from  countries  where  prices  are  high,  and  toward  coun- 
tries  where    they  arc  low,  it   follows    that  Relative  dis- 

.,  ,        ,  ,  i  tribution  of 

there  is  a  constant  tendency  toward  an  goid  and  sii- 
equalization  of  general  levels  of  prices  in  ^f^^teen 
all  countries.  The  purchasing  power  of  countries, 
money  cannot  remain  permanently  very  much  higher 
in  one  country  than  it  is  in  others.  Each  country  will 
need  a  certain  amount  of  money  in  order  to  effect  its 
exchanges  at  the  same  level  of  general  prices  that  pre- 
vails in  other  countries.  If  any  country  has  less  than 
the  amount  needed  for  that  purpose,  prices  will  fall  in 
that  country,  and  gold  or  silver  will  begin  to  move 
thither.  Conversely,  if  any  nation  has  more  than  this 
amount,  prices  will  rise,  and  the  money  metals  will 
flow  elsewhere.  It  follows,  therefore,  that  the  world's 
stock  of  the  precious  metals  will  constantly  tend  to  he 
distributed  among  different  countries  in  proportion  to 
their  relative  demands  for  the  money  needed  in  order  to 
maintain  the  same  general  level  of  prices. 

§  176.    Most  of  the  great  nations  of  the  world  do  not 
produce  large  quantities  of  gold  and  silver.     In  the  few 
countries  where  large  amounts  of  the  money   situation  of 
metals  are  produced,  there  is  a  constant  ten-  produce  the 
dency  for  the  value  of  gold  and  silver  to  fall.   moaey  metals- 
This  means,  of  course,  a  somewhat  higher  level  of  prices, 
an  excess  of  imports  over  exports,  and  a  constant  expor- 
tation of  the  precious  metals.     The  result  is  that  gold 


282  PRINCIPLES   OF  ECONOMICS. 

and  silver  tend  to  move  away  from  the  countries  where 
they  are  produced,  and  toward  countries  where  their 
value  is  not  continually  lessened  through  a  large  pro- 
duction. Of  the  $2,000,000,000  of  gold  mined  in  the 
United  States  since  1848  less  than  one  third  or  one 
fourth  remains  in  circulation  in  the  country  at  the 
present  day.  The  same  is  true  of  all  the  other  gold  or 
silver  producing  countries. 

V.  Summary  of  the  Theory  of  Money. 

§  177.  We  have  seen  that,  originally,  money  was  any 
commodity  winch  acquired  such  universal  exchange- 
wnat  is  ability  as  to  fit  it  to  serve  as  a  medium  of 
money?  exchange;  and  that  gold  and  silver  gradu- 
ally displaced  all  other  commodities  in  this  function. 
In  course  of  time,  bills  of  exchange,  checks,  bank  notes, 
and  government  paper  money  were  used  as  means  of 
paving  debts.  We  saw  that  bills  of  exchange  and 
checks  can  be  safely  utilized  in  payment  for  commodi- 
ties and  services.  Bank  notes  are  merely  promises  to 
pay  money,  and  are  safe  only  so  long  as  bankers  are 
obliged  to  keep  them  strictly  convertible  into  money. 
Government  paper  is  generally  a  dangerous'  medium  of 
exchange,  and  can  be  used  safely  only  under  the  strict- 
est provisions  for  keeping  the  notes  at  a  parity  with 
gold  or  silver.  It  appears,  then,  that  all  these  forms 
of  so  called  "  credit  money  "  arc  based  upon  promises 
or  obligations  to  pay  gold  and  silver ;  and  that  they 
become  exceedingly  harmful  as  soon  as  they  cease  to 
be  immediately  convertible  into  standard  gold  or  silver 


SUMMARY.  283 

money.  Standard  coins  of  gold  or  silver  cannot  be 
artificially  and  arbitrarily  increased  or  decreased,  and 
they  are  accepted  as  final  payment  for  debts.  They 
are,  therefore,  the  only  perfect  form  of  money.  All 
other  instruments  of  exchange  are  more  or  less  imper- 
fect, and  maintain  their  credit  and  acceptability  only  as 
they  are  finally  convertible  into  perfect  money.  We 
may  call  all  such  media  of  exchange  "  representative 
money,"  while  reserving  to  gold  and  silver  alone  the 
name  of  money  proper.  In  common  usage  all  media 
of  exchange  are  spoken  of  as  money,  and  there  is  no 
harm  in  this  so  long  as  one  takes  care  to  distinguish 
money  proper  from  representative  money. 

§  178.  In  discussing  the  value  of  metallic  money,  we 
assumed  that  all  exchanges  are  effected  solely  by  means 
of  money.     But  we  have  now  seen  that  a  T  _ 

J  Influence  of 

very  large  part  of  the  business  of  the  world  credit  upon 

prices 

(perhaps  even  more  than  sixty  per  cent) 
is  carried  on  without  the  actual  use  of  anything  but 
instruments  of  credit.  How  does  this  fact  affect  our 
conclusion  that  the  value  of  metallic  money  is  deter- 
mined primarily  by  the  demand  for  such  money  and 
the  supply,  while  the  cost  of  production  exercises  an 
ultimate  influence  ?  It  merely  obliges  us  to  take  account 
of  the  influence  of  instruments  of  credit  in  determining 
the  demand  for  gold  and  silver  and  the  effective  supply 
of  such  money. 

§  179.  In  the  words  of  Mr.  Mill,  credit  "  is  purchas- 
ing power  ;  and  a  person  who,  having  credit,  avails 
himself  of  it  in  the  purchase  of  goods,  creates  just  as 


284  PRINCIPLES  OF  ECONOMICS. 

much  demand  for  the  goods,  and  tends  quite  as  much 

to  raise  their  price,  as  if  he  made  an  equal  amount  of 

purchases   with  ready   money."      A  bill    of 
The  general       '  J  J 

effects  of  exchange  or  check  or  bank  note  or  book 
credit  is  an  instrumentality  by  means  of  which 
there  is  carried  on  a  credit  transaction  that  increases 
the  demand  for  commodities.  Therefore  the  total  de- 
mand of  a  community  for  commodities  depends  upon, 
first,  the  volume  of  money,  second,  the  number  of  credit 
transactions,  or  the  volume  of  credit.  Any  cause  that 
contracts  or  expands  the  volume  of  credit  will  surely 
tend  to  lower  or  to  raise  prices  of  commodities. 
The  limit  to  which  credit  may  be  extended  depends 
largely  upon  the  confidence  of  investors  and  possible 
creditors  that  business  prosperity  will  enable  debtors  to 
make  repayment,  and  upon  confidence  that  public  and 
private  honesty  will  enforce  the  fulfillment  of  lawful 
obligations.  It  is  truthfully  said,  therefore,  that  the 
basis  of  modern  business  is  confidence.  Without  the 
confidence  upon  which  credit  is  built  up,  probably  sixty 
per  cent  of  the  transactions  of  the  modern  business  world 
would  be  impossible.  In  times  of  commercial  crises, 
the  visible  cause  of  disaster  is  a  violent  contraction  of 
credit  which  greatly  lessons  the  demand  for  commodi- 
ties, and  leads  to  a  sharp  fall  of  prices. 

§  180.    Credit  transactions  are  all  alike  in  that  they 

Detailed  ex-     furnish  means  of  payment  to  purchasers  who 

pianationof     ne|„  j.Q   }ncrcasc  the  demand  for  commodi- 
the  Influence  l 

cf  credit.         ties.     But  they  differ  in  the  exact  manner 
in    which  they  accomplish  this  result. 


SUMMARY.  285 

1.  Book  credits,  bills  of  exchange,  and  promissory 
notes  merely  serve  to  effect  a  large  number  of  ex- 
changes without  the  use  of  money.  They  diminish 
the  amount  of  metallic  money  needed  to  effect  the  ex- 
changes of  a  community  or  a  nation.  They  may  be  con- 
sidered either  to  increase  the  amount  of  the  medium  used 
for  exchange,  or  to  decrease  the  demand  for  metallic 
money. 

2.  Checks  can  be  used  only  by  persons  who  have 
claims  on  bankers  for  certain  sums  of  money.  In  order 
to  meet  such  claims  of  depositors,  bankers  have  to  keep 
a  certain  reserve  of  actual  money.  So  also  with  bank 
notes.  They  must  be  issued  against  a  reserve  sufficient 
to  insure  their  convertibility  into  coin.  Bank  reserves 
are  used  as  the  basis  for  the  issue  of  a  much  larger 
amount  of  representative  money  in  the  form  of  checks 
and  bank  notes.  Each  coin  of  the  reserve  enables  many 
more  exchanges  to  be  carried  on  than  could  be  effected 
if  the  coin  were  itself  in  circulation.  Checks  and  bank 
notes,  therefore,  merely  increase  the  efficiency  of  a 
given  number  of  coins,  and  virtually  increase  the  supply 
of  metallic  money  to  that  extent. 

3.  The  late  President  Walker  summed  the  matter 
up  as  follows :  "  While  thus,  through  the  operation  of 
the  Credit  System,  the  occasion  for  the  use  of  money 
is  largely  reduced  in  modern  industrial  society,  and  thus 
the  demand  for  money  is  diminished,  the  efficiency  of  a 
given  body  of  money  is  continually  being  heightened  by 
improvements  in  the  art  of  banking,  and  thus  the  supply 
of  money  is  practically  increased." 


286  PRINCIPLES   OF  ECONOMICS. 

§  181.    Under    modern    conditions,    metallic    money 

serves,  (1)    as  a  medium  of  exchange  in  those  trans- 

credit  limited  actions  where  credit  instruments  cannot  be 

by  volume       used,  or  are  not  used;  (2)  as  a  reserve  for 

of  metallic  '    v    J 

money.  the  circulation  of  representative   or   credit 

money.  But  the  amount  of  representative  money  that 
can  be  issued  against  a  definite  reserve  is  quite  strictly 
limited,  and  cannot  be  increased  safely  beyond  a  certain 
point.  Hence  it  can  be  stated  that,  as  the  volume  of 
metallic  money  increases,  there  may  be  a  considerable 
increase  in  the  volume  of  representative  money  ;  and 
conversely.  In  the  case  of  book  credits  and  bills  of 
exchange  used  to  pay  debts,  there  may  be  no  such  nar- 
row limits  to  the  increase  of  credit  instruments.  Yet 
the  habits  and  business  customs  of  a  people  set  final 
bounds  to  the  increase  of  such  credit  transactions.  We 
conclude,  therefore,  that  modern  business  needs  a  large 
amount  of  metallic  money  for  a  medium  of  exchange ; 
and  that  the  volume  of  credit  is,  at  any  time,  limited  by 
the  volume  of  metallic  money  available  for  use  as  a 
reserve. 

§  182.   The  general  level  of  prices  depends,  therefore, 

upon  the  value  of  metallic  money.    The  value  of  metallic 

money  depends  primarily  upon  the  demand, 

Summary. 

as  decreased  by  the  use  of  credit  substitutes,1 
and  upon  the  supply,  as  increased  by  the  heightened 
efficiency  of  money  when  it  is  used  as  a  reserve  for  the 
circulation  of  checks  and  bank  notes.     The  money  value 

1  It  may  ho  well  to  point  out  that  barter  has  the  same  effect  as  credit 
in  diminishing  the  demand  for  money. 


LITERATURE.  287 

and  the  bullion  value  of  gold  and  silver  will  always  be 
the  same  when  free  coinage  is  allowed.  Ultimately,  the 
cost  of  production  must  exercise  an  influence  upon  the 
supply  of  the  precious  metals  ;  and  will,  in  the  long  run, 
tend  to  make  their  value  approximate  the  cost  of  produc- 
ing the  marginal  portion  of  the  supply. 


LITERATURE   ON  CHAPTER  IX. 

General  references  as  in  the  last  chapter. 

For  Detailed  Treatment  of  the  Credit  System,  including 
Banking:  Bagehot,  Lombard  Street;  Bolles,  Practical  Bank- 
ing ;  Carroll,  Principles  and  Practice  of  Finance  ;  Dictionary  of 
Political  Economy,  "Banks";  Dunbar,  Theory  and  History  of 
Banking ;  GOSCHBN,  Foreign  Exchanges ;  Macleod,  Elements 
of  Banking  ;  Report  of  the  Monetary  Commission  of  the  Indianap- 
olis Convention,  159-386 ;  White,  Money  and  Banking;  Conant, 
Modern  Bank  of  Issue. 


288  PRINCIPLES  OF  ECONOMICS. 


CHAPTER  X. 

MONETARY   HISTORY   OF   THE    UNITED   STATES. 
BIMETALLISM. 

I.    Monetary  History  of  the  United  States. 

§  183.  In  1792  Congress  established  a  national  coin- 
age. Silver  and  gold  coins  were  made  legal  tender  at  a 
Coin  currency  ratio  of  fifteen  grains  of  silver  for  one  grain 
I792-I862.  0f  g0](j  Soon  afterward  silver  cheapened 
so  that  15.61  grains  were  required  in  the  bullion  market 
to  purchase  one  grain  of  gold.  As  a  result,  gold  went 
out  of  circulation  ;  and  the  country  was  thrown  upon 
a  silver  basis.  In  1834  and  1837  Congress  changed  the 
legal  ratio  of  the  two  metals  by  reducing  the  fine  con- 
tents of  the  gold  coins.  The  silver  dollar  was  given  a 
gross  weight  of  412.5  grains,  and  pure  contents  of  371.25 
grains.  The  gold  eagle  was  reduced  to  pure  contents  of 
232.2  grains,  and  to  a  gross  weight  of  258  grains.  This 
gave  a  legal  ratio  of  371.25  grains  of  silver  for  23.22 
grains  of  gold,  or  15.088  to  1.  The  weights  of  the  coins, 
hence  the  legal  ratio,  have  remained  unchanged  since 
1837.  This  new  ratio  of  nearly  16  to  1  overvalued  gold 
so  decidedly  that  silver  coins  began  to  disappear  from  cir- 
culation. In  1850  the  silver  dollar  was  worth  $1.02  in 
gold,  and  had  entirely  disappeared   from  use.      Three 


MONETARY  HISTORY  OF  THE  UNITED  STATES.    289 

years  later  the  discovery  of  gold  in  California  cheapened 
gold  still  more,  so  that  Congress  had  to  debase  the  frac- 
tional silver  coins  in  order  to  prevent  them  from  being 
melted  up  and  sold  for  bullion.  Our  small  silver  coins 
have  been  debased  ever  since.  The  legislation  of  1834 
and  1837  threw  the  United  States  upon  a  gold  basis. 
The  gold  dollar  was  the  sole  standard  of  value  in  prac- 
tical use  after  1834. 

§  184.  In  1862  Congress  issued  legal-tender  paper 
money,  after  unwise  action  by  the  Treasury  Department 
bad  forced  the  banks  of  the  country  to  sus-  Thegreen- 
pend  specie  payments,  that  is,  to  refuse  to  backs of  I862- 
meet  their  obligations  in  coin.  These  United  States 
notes,  or  "  greenbacks,"  immediately  depreciated.  Gold 
went  out  of  circulation,  and  could  be  secured  only  by 
paying  a  premium.  Paper  money  or  currency  prices 
rose  as  fast  as  the  greenbacks  depreciated.  In  1864 
each  note  was  worth  only  49  per  cent  of  its  face  value. 
The  United  States  had  the  privilege  of  paying  higher 
prices  for  everything  that  it  bought,  so  that  the  cost  of 
the  Civil  War  was  fully  one  billion  dollars  more  than  it 
would  have  been  otherwise.  In  1875  Congress  author- 
ized the  Secretary  of  the  Treasury  to  sell  bonds  in  order 
to  procure  enough  gold  to  enable  him  to  begin  to  redeem 
the  greenbacks  in  coin  after  January  1,  1879.  In  1878 
Congress  decided  to  leave  8346,000,000  of  greenbacks  in 
circulation,  and  directed  that  the  notes  should  be  reissued 
from  the  Treasury  whenever  they  should  be  redeemed  or 
paid  in  for  taxes.  The  greenbacks,  therefore,  still  cir- 
culate, and  the   government   endeavors  to   maintain  a 

l» 


290  PRINCIPLES  OF  ECONOMICS. 

reserve  of  $100,000,000  in  order  to  redeem  them  when- 
ever desired. 

§  185.    Between  1789  and  1860  many  banks  were  estab- 
lished in  the  various  states.     At  first  they  were  con- 
ducted  recklessly   and   dishonestly.     Large 

The  national  J  J  ° 

banking  quantities  of  notes  were  issued  by  banks 
that  had  no  intention  of  redeeming  them. 
In  1814,  1837,  and  1857  there  were  general  bank  sus- 
pensions throughout  the  country.  The  first  and  second 
Banks  of  the  United  States  issued  notes  which  were  kept 
convertible  into  coin.  Gradually,  in  the  older  and  more 
conservative  states,  restrictions  were  placed  on  the  issue 
of  bank  notes  ;  and  the  banking  business  began  to  be 
honestly  conducted.  In  1860  it  had  been  placed  on  a 
sound  and  honest  basis  in  the  northern  and  eastern 
states.  In  1863  and  1864  Congress  established  the 
national  banking  system,  and  allowed  national  banks  to 
issue  notes  upon  the  following  conditions  :  — 

1.  A  Comptroller  of  the  Currency  was  placed  in 
charge  of  the  administration  of  the  banking  laws. 
Each  bank  was  required  to  report  its  condition  to  him 
five  times  annually,  while  examiners  were  appointed  to 
examine  the  affairs  of  each  institution. 

2.  Each  national  bank  must  have  a  capital  of  not  less 
than  $25,000,  and  stockholders  are  liable  for  the  debts 
of  the  bank  to  double  the  par  value  of  their  stock. 

3.  A  certain  proportion  of  the  capital  of  each  bank 
must  be  invested  in  registered  interest-bearing  bonds  of 
the  United  States,  deposited  in  the  national  Treasury. 

4.  On  the  security  of  these  bonds  a  bank  may  issue 


MOM: 'TAR Y  Iff  STORY  OF  THE  UNITED  STATES.    291 

notes  to  an  amount  not  exceeding  the  par  value  of  the 
bonds;  but  the  Comptroller  may  require  additional 
security  if  the  bonds  ever  fall  below  par. 

5.  These  notes  are  not  legal  tender ;  but  are  receiv- 
able for  taxes,  except  for  duties  on  imports,  and  arc 
receivable  for  payments  to  any  national  bank.  Eacb 
bank  must  redeem  its  notes  on  demand  in  legal-tender 
money. 

6.  Banks  must  deposit  in  tbe  Treasury  a  fund  equal 
to  five  per  cent  of  their  outstanding  circulation.  Thus 
the  United  States  undertakes  to  redeem  notes  presented 
at  ,the  Treasury  ;  and  would  do  so  even  if  the  fund 
proved  insufficient,  having  adequate  security  in  the 
bonds  and  in  a  first  lien  upon  the  assets  of  a  bank. 
Consequently  the  notes  are  practically  guaranteed  by 
the  government. 

7.  Each  bank  must  keep  a  reserve  of  lawful  money. 
In  smaller  cities  a  reserve  of  fifteen  per  cent  of  the 
deposits  is  required.  In  the  "reserve  cities"  a  reserve 
of  twenty-five  per  cent  is  necessary.  Banks  in  smaller 
cities  may  deposit  sixty  per  cent  of  their  reserves  with 
banks  in  reserve  cities.  Banks  of  reserve  cities  may 
deposit  fifty  per  cent  of  their  reserves  with  banks  in 
"central  reserve  cities,"  that  is,  in  New  York,  Chicago, 
and  St.  Louis. 

8.  Banks  are  taxed  one-half  of  one  per  cent  on  their 
circulation.  The  notes  formerly  issued  by  state  banks 
have  been  taxed  out  of  existence  by  a  tax  of  ten  per 
cent,  which  made  such  issues  unprofitable. 

National    bank    notes   have   possessed   the  virtue   of 


292  PRINCIPLES  OF  ECONOMICS. 

being  thoroughly  uniform  throughout  the  country  and 

absolutely  safe.     Moreover,  a  strict  enforce- 

the  national     nient   of  the   law   has    secured    an   honest 

tanking         management   of   the   national   banks,  as   a 

system. 

rule.  State  and  private  banks  have  had  to 
make  their  methods  equally  safe,  under  penalty  of  losing 
business.  Undoubtedly  the  banking  business  in  the 
United  States  has  been  greatly  elevated  as  a  result  of 
the  national  banking  laws. 

§  186.  In  1870,  with  a  view  to  the  future  resumption 
of  specie  payments,  Congress  began  to  consider  the 
The  "Act  question  of  revising  the  coinage  laws.  The 
of  1873."  silver  dollar  had  then  been  out  of  circulation 
for  more  than  a  generation,  and  was  worth  $1,027  in  gold. 
A  committee  of  experts  submitted  the  draft  of  a  bill 
recommending  that  the  coinage  of  the  obsolete  silver 
dollar  should  be  stopped.  After  considering  the  subject 
during  five  successive  sessions,  in  the  course  of  which 
the  bill  was  printed  thirteen  times,  Congress  passed  an 
act  which  dropped  the  silver  dollar  from  the  list  of 
authorized  coins.  This  provision  of  the  measure  aroused 
no  opposition,  and  members  of  Congress  repeatedly 
stated  that  the  intention  was  to  establish  legally  the 
single  gold  standard.  Yet  it  has  been  wrongly  charged 
that  this  measure  passed  Congress,  "  secretly,"  or  "  in- 
advertently," or  even  with  absolute  fraud. 

§  187.    After     1873    silver    began    to   fall    in    value 

The "Biand-    rapidly.     In  1876  the  gold  value  of  371.25 

Aiuson Act."  grains  of    fine    silver  was   only  eighty-nine 

cents.     At  the  same  time  preparations  were  being  made 


MONETARY  HISTORY  OF  THE  UNITED  STATES.     293 

for  redeeming  the  greenbacks  in  gold,  and  bringing  the 
country  back  to  a  gold  basis  in  1879.  Then  people  saw 
that,  if  the  coinage  of  the  silver  dollar  had  not  beeju-. 
fitopjjfid  by  the  law  passed  in  1873,  the  cheapened  dollar 
might  have  come  back  into  circulation  and  driven  out 
gold. '  Thus  arose  a  demand  for  the  free  and  unlimited 
coinage  of  the  silver  dollar,  and  the  cry  was  started  that 
silver  had  been  "demonetized"  fraudulently  in  1873. 
Yielding  to  this  agitation,  Congress  in  1878  passed  the 
"Bland-Allison  Act."  This  provided  that  the  United 
States  should  purchase  monthly  not  more  than  $4,000,000 
worth  of  silver  bullion  and  not  less  than  $2,000,000 
worth.  The  bullion  was  to  be  coined  into  the  old  371.25- 
grain  silver  dollars,  and  such  dollars  were  made  full 
legal  tender.  Under  this  act  the  Treasury  always  pur- 
chased the  minimum  amount,  and  placed  $378,166,793 
in  circulation  between  1878  and  1890.  Contrary  to  the 
expectation  of  many  people,  this  amount  of  silver  proved 
to  be  no  more  than  the  business  of  the  country  could  use 
without  driving  gold  out  of  circulation,  especially  since 
the  volume  of  bank  notes  decreased  about  $170,000,000 
between  1882  and  1890.  On  the  other  hand,  the  law 
failed  to  raise  the  value  of  silver,  contrary  to  the  claim 
which  had  been  made  for  it.  In  1889  the  value  of  the 
bullion  in  the  silver  dollar  was  only  seventy-two  cents. 
§  188.  The  United  States  issues  gold  and  silver  cer- 
tificates upon  deposits  of  gold  and  silver 
coins.  The  gold  certificates  are  of  large  silver certifi- 
denominations,  the  silver  are  of  denom- 
inations as  small  as  one  dollar.     These  certificates  are 


294  PRINCIPLES   OF  ECONOMICS. 

not  legal  tender,  but  are  receivable  for  taxes,  and  may 
be  held  by  national  banks  as  part  of  their  reserves. 

§   189.    In    1890    the   friends   of    silver   pushed   the 

"Sherman  Act"  through   Congress,  and   repealed   the 

"  Bland-Allison   Act."      The    new   law    re- 

The  "  Sher- 
man Act"      quired   the    Secretary    of    the    Treasury    to 

purchase  monthly  4,500,000  ounces  of  fine 
silver  bullion  at  the  market  price,  which  was  not  to 
exceed  $1  for  371.25  grains  of  fine  bullion.  The  pur- 
chases were  paid  for  by  issuing  Treasury  notes,  which 
were  redeemable  in  coin  at  the  Treasury,  and  could  be 
reissued.  These  notes  were  also  made  legal  tender. 
Even  these  increased  purchases  of  silver  failed  to  raise 
its  price,  which,  after  a  brief  rise,  fell  to  sixty  cents  for 
371.25  grains  of  bullion  in  1893.  The  effects  of  the 
"  Sherman  Act  "  were  wholly  disastrous.  Between  1890 
and  1893,  Treasury  notes  to  the  amount  of  $155,931,000 
were  placed  in  circulation.  During  the  same  period  the 
net  exports  of  gold  exceeded  8150,000,000,  in  spite  of 
the  fact  that  our  exports  of  merchandise  exceeded  im- 
ports very  greatly.  Apparently  the  country,  by  1890. 
had  absorbed  about  all  the  silver  it  could  use,  so  that 
the  Treasury  notes  merely  drove  an  equivalent  amount 
of  gold  out  of  the  United  States.  In  any  event,  the  act 
caused  considerable  fear  that  the  United  States  would 
be  driven  onto  a  silver  basis.  Immediately  after  its 
passage,  the  banks  began  to  hoard  gold,  and  to  pay  their 
obligations  in  paper  or  in  silver.  The  government's 
revenues  were  paid  almost  entirely  in  paper  or  in  silver 
money,  instead  of  being  paid  largely  in  gold  as  was  the 


MONETARY  HISTORY  OF  THE  UNITED  STATES.    295 

case  prior  to  1890.  Moreover,  the  holders  of  green- 
backs and  Treasury  notes  began  to  present  them  at  the 
Treasury,  and  ask  for  payment  in  gold.  When  this  was 
done,  the  government  feared  to  refuse  gold  and  to  at- 
tempt to  redeem  the  notes  in  silver,  since  such  a  course 
would  have  discredited  both  its  silver  and  its  paper 
money.  Thus  it  was  compelled  to  pay  out  large  quan- 
tities of  gold,  while  its  revenues  were  composed  chiefly 
of  paper  and  silver.  In  1893  such  an  acute  stage  of 
panic  was  reached  that  the  "  Sherman  Act"  was  finally 
repealed. 

§  190.   The  United  States  now  has  the  most  hetero- 
geneous currency  that  can  be  found  in  any  civilized 

country.      On  July   1,  1899,   the   stock    of 

Heterogeneous 
gold    in    this    country    was    estimated    at  character  of 

1963,000,000,—  a  figure  which  may  be  some-  ourcurrency- 
what  too  large.     Of  this  amount,  8283,760,334  was  in 
the  Treasury.     At  the  same  time  there  were  in  circula- 
tion or  in  the  Treasury  the  following  amounts  of  debased 
money :  — 

United  States  notes,  or  greenbacks $346,681,000 

Standard  silver  dollars  or  certificates  represent- 
ing dollars 602,215,000 

Treasury  notes  of  1890 93,518,000 

Subsidiary  silver  coins 74,866,000 

Total $1,017,280,000 

In  addition  to  this,  the  notes  issued  by  the  national 
banks  amounted  to  #241,350,000. 

In  order  to  prevent  this  mass  of  debased  money  from 
depreciating,  two  things  are  necessary:  first,  the  volume 


296  PRINCIPLES  OF  ECONOMICS. 

of  debased  currency  must  not  exceed  the  quantity  which 
the  people  of  the  country  are  prepared  to  keep  in  circu- 
Recent  lation  ;  second,  the  Treasury  must  always  be 

legislation.  jn  a  pOS^jon  to  redeem  promptly  in  gold  the 
$441,199,000  of  greenbacks  and  Treasury  notes  that 
represent  its  demand  liabilities.  If  this  can  be  accom- 
plished, the  business  of  the  country  can  probably  absorb 
the  existing  quantity  of  silver  and  paper  money.  The 
"Act  of  March  14,  1900,"  is  intended  to  make  our 
monetary  system  more  secure.  It  declares  that  the 
present  gold  dollar  is  the  standard  of  value  in  the 
United  States,  and  that  all  other  forms  of  money  are  to 
be  maintained  at  a  parity  with  gold.  Then  it  sets  aside 
$150,000,000  in  gold,  as  a  fund  for  redeeming  the  green- 
backs and  Treasury  notes  ;  and  authorizes  the  Secretary 
of  the  Treasury,  in  case  of  need,  to  sell  bonds  in  order 
to  maintain  this  gold  reserve.  So  far,  the  enactment 
is  worthy  of  all  praise.  It  has  been  thought  that  this 
law  will  put  a  stop  to  the  reissue  of  notes  that  have  once 
been  redeemed,  and  will  thus  gradually  effect  the  retire- 
ment of  our  government  paper.  But  a  careful  reading 
of  the  somewhat  obscure  provisions  of  the  law  upon  this 
point  does  not  justify  such  a  belief.  On  the  contrary, 
it  would  seem  that  the  law  authorizes  the  reissue  of 
redeemed  notes  for  any  "lawful  purpose  the  public 
interests  may  require,"  except  "  deficiencies  in  the  cur- 
rent revenues."  * 

1  See  Sound  Currency,  vii.  42,  47.  Up  to  March  14, 1900,  tlie  Treasury 
had  redeemed  $546,470,914  <>f  the  notes,  and  nearly  all  <>f  these  had  heen 
reissued. 


BIMETALLISM.  297 


II.  Bimetallism. 

§  191.  Prior  to  the  present  century  most  civilized 
countries  made  gold  and  silver  legal  tender  in  pay- 
ment of  debts.  Each  nation,  by  independent  naaonai 
action  and  often  with  an  independent  legal  bimetallism. 
ratio,  sought  to  keep  both  metals  in  circulation,  and  to 
give  to  debtors  the  option  of  paying  debts  with  either 
gold  or  silver  coins.  The  usual  result  of  such  attempts 
was  that  one  metal  or  the  other  went  out  of  circulation 
as  often  as  a  change  in  the  market  ratio  of  silver  and 
gold  bullion  cheapened  one  kind  of  coin  or  the  other. 
The  experience  of  the  United  States  after  1792  or  1834 
illustrates  the  usual  results  of  "  national  bimetallism," 
the  term  applied  to  such  attempts  of  individual  nations 
to  make  both  gold  and  silver  circulate  at  a  fixed  ratio. 

§  192.  In  1816  England  debased  her  silver  coins, 
made  them  legal  tender  only  for  small  payments,  and 
made  gold  the  sole  legal-tender  money.  In  Goidmono- 
1871  and  1873  Germany  established  a  na-  »etaiiism. 
tional  gold  coinage,  and  withdrew  most  of  the  old  silver 
coins  that  had  formerly  circulated  in  the  various  Ger- 
man states.  In  1873  the  United  States  relegated  silver 
to  a  position  as  subsidiary  currency.  Meanwhile  the 
world's  annual  production  of  silver  was  increasing  from 
about  30,000,000  ounces  in  1860  to  78,775,602  ounces 
on  an  average  for  the  period  1876-1880.  At  this  time 
France  and  a  few  other  countries,  which  formed  the  Latin 
Monetary    Union,  still   held    their   mints   open   to   the 


298  PRINCIPLES   OF  ECONOMICS. 

free  coinage  of  silver  at  the  ratio  of  15.5  to  1.  Silver 
cheapened  so  greatly  that  it  began  to  flow  in  large 
quantities  to  the  French  mints,  and  France  became 
afraid  that  all  her  gold  would  be  soon  replaced  by  the 
cheaper  silver  coins.  In  1876,  when  the  market  ratio 
of  silver  to  gold  had  fallen  to  17.88  to  1,  the  French 
mints  were  closed  to  silver ;  and  the  coinage  of  the 
white*  metal  ceased.  Since  then,  Austria  has  passed 
from  a  depreciated  paper  currency  to  a  gold  basis,  and 
other  countries  have  shown  a  desire  to  adopt  gold 
monometallism.  The  present  century,  therefore,  has 
seen  a  decided  drift  toward  the  adoption  of  a  single 
gold  standard  by  civilized  countries. 

§  193.    Most  of  the  countries  of  Asia  and  of  South 

America  have  the  single  silver  standard.     Since  1893, 

however,  the  mints  of  India  have  been  closed 

Silver 

monometai-      to  the  further  coinage  of  silver.       At   the 
present  writing  news  comes  of  the  practical 
acceptance  of  the  gold  standard  by  Japan,  through  the 
adoption  of  a  legal  ratio  of  33.33  to  1. 

§  194.  Within  the  last  thirty  years  the  scheme  of 
international  bimetallism  has  often  been  proposed.  Its 
international  advocates  have  usually  admitted  that  na- 
bimetaiiism.  tional  bimetallism  is  impossible,  and  results 
in  the  exclusive  use  of  the  cheaper  metal.  But  they 
claim  that,  if  the  principal  nations  of  the  civilized  world 
should'agree  to  make  both  metals  legal  tender  at  a  fixed 
ratio,  and  should  allow  free  coinage  of  both  under  such 
conditions,  it  would  be  possible  to  keep  both  metals  in 
concurrent  circulation.     On  this    proposition    scientific 


BIMETALLISM.  299 

authorities  are  divided  at  the  present  time.     It  will  be 

necessary  to  review  the  arguments  advanced  for   and 

against  international  bimetallism. 

§  195.    It  is   claimed   that   bimetallism    is    desirable 

because  it  would  give  a  more  stable  unit  of  money  than 

either  gold  or  silver  monometallism  could 

0  The  desira- 

secure.     The  world's  stock  of  both  of  the    wutyof 

,    i  i  ii     .  i  •        bimetallism.      \\ 

precious  metals  is  so  large  that  a  change  in  \\ 

the  production  of  one  would  not  greatly  affect  the  value 
of  the  whole  mass.  Under  monometallism,  a  change  in 
the  production  of  the  money  metal  more  quickly  affects 
the  value  of  that  metal.  Moreover,  with  bimetallism, 
an  increase  in  the  production  of  one  metal  might  be 
offset  by  a  decrease  in  the  production  of  the  other. 
This  claim  is  correct,  p?'ovichd  that  it  can  be  proven 
that  it  is  possible  to  hold  the  two  metals  together  at  a 
legal  ratio. 

Bimetallists   call   attention    to    the    fact    that    there 
has  been  a  general  fall  of  prices  in  all  gold  standard 
countries  since  1873.    This  was  once  denied,  Bimetaiiist 
but   is    now   admitted    by    all.1     This   fall,  £0g^ffall 
bimetallists   say,   has    injured    debtors    by  of  prices, 
increasing  the  burden  of   debts;    moreover,  it  has  de- 
pressed industrial  enterprises,  and  will  do  so  as  long  as 
it   continues.       The   bimetaiiist    attributes   this   fall    of 
prices   to   the   fact   that    since    1873    silver    has    been 

1  For  the  index  numbers  from  which  the  fall  of  prices  is  ascertained, 
see  Fisher,  Appreciation  ami  Interest,  98-100 ;  Taussig,  Silver  Situation, 
91-92;  Atkinson,  Bimetallism  in  Europe,  602,  633.  Also  a  Bulletin  on 
"Movement  of  Prices,  1840-1894,"  published  by  the  Bureau  of  Statistics, 
Treasury  Department,  Washington,  1895. 


300  PRINCIPLES   OF  ECONOMICS. 

"  demonetized  "  in  many  countries.  The  principal  com-  ^ 
mercial  nations  now  have  the  single  gold  standard. 
Gold  monometallism  has  increased  the  demand  for  gold, 
and  has  raised  its  value, 
^"f  Gold  monometallists  attribute  the  fall  of  prices  to 
improvements  in  production  that  have  decreased  the 
cost  of  producing  commodities.  But  this 
gold  mono-  docs  not  change  the  fact  that  the  ratio  in 
metaiiists.  which  gold  exchanges  for  commodities  has 
altered,  and  that  the  purchasing  power  of  gold  has 
risen.  It  does,  however,  make  it  probable  that  falling 
prices  have  been  due  to  an  increasing  supply  of  commod- 
ities more  than  to  an  absolute  decrease  in  the  supply 
of  gold  money.  Gold  has  become  more  scarce,  not 
absolutely,  but  relatively  to  the  larger  production  of 
commodities.  This  diminishes  the  injury  that  can  be 
done  to  debtors.  Prices  may  have  fallen,  but  new 
methods  and  appliances  turn  out  a  larger  product ;  so 
that  about  the  same  money  return  can  be  secured  from 
a  business  enterprise.  This  consideration  has  force 
when  applied  to  industries  where  new  methods  have 
been  introduced,  but  docs  not  lessen  the  burden  laid 
upon  a  debtor  whose  business  has  not  been  affected  by 
improvements.  Finally,  monometallists  say  that  debts 
are  contracted  in  money,  not  in  commodities  nor  in 
general  purchasing  power.  From  1850  to  1873  prices 
rose  ;  since  1873  they  have  fallen  ;  in  a  few  years  they 
may  rise  again.  Such  changes  arc  a  part  of  the  risk 
incurred  by  persons  who  enter  into  long-time  contracts. 
They  might  occur  under  bimetallism.     In  any  case,  we 


BIMETALLISM.  801 

ougnt  not  to  interfere  with  past  contracts.      We  may 

admit  this,  and  yet   may  insist  that  it  is  advisable  to 

lessen  the  risks  of  changes  in  prices  that  may    affect 

future  contracts. 

Bimetallists  urge  that  the  world's  stock  of  gold  is  not 

sufficient  for  the  money  demand  of  the  world,  and  that 

gold    monometallism    must   lead    to   a  con- 
Arguments 
tinned  fall  of  prices.     Geological  conditions  from  the 

are  such  that  "  we  must  expect  in  the  future  ^sufficiency 
a   scarcity   of   gold   and   an   abundance    of  of  the  world'« 

J  D  stock  of  gold. 

silver,  and  that  the  extension  of  the  gold 
standard  to  all  civilized  states  is  impossible."  Between 
1870  and  1890  the  annual  production  of  gold  averaged 
hardly  more  than  5,200,000  ounces,  with  a  value  of 
about  $108,000,000.  The  annual  consumption  of  gold 
in  the  arts  in  civilized  countries  has  never  been  estimated 
at  less  than  $60,000,000.  Besides  this,  a  large  quantity, 
estimated  by  the  highest  authority  as  not  less  than 
$20,000,000,  is  exported  annually  to  the  semi-civilized 
countries  of  Asia  and  Africa,  where  it  is  hoarded  or 
used  for  ornaments.  This  leaves  only  about  $25,000,000 
of  gold  for  making  good  the  loss  of  existing  coins 
by  abrasion,  and  for  supplying  the  needs  of  increased 
trade.1 

The  force  of  this  argument  of  insufficiency  in  supply 
is  weakened  by  the  phenomenal  increase  of    Kecent  old 
the  gold  output  since  1890,  as  shown  by  the    production, 
following  table,  on  page  302  :  — 

1  For  statistics  on  these  points,  see  Soetbeer's  tables,  in  Atkinson, 
Bimetallism  in  Europe,  504-528. 


302 


PRINCIPLES  OF  ECONOMICS. 


Year. 

Fine  ounces 
produced. 

Value  of  product. 

1890 
1892 
1894 
1895 
1896 
1897 

5,749,000 
7,094,000 
8,704,000 
9,041,000 
9,817,000 
11,489,000 

$118,848,000 
140,051,000 
181,175,000 
199,304,000 
202,950,000 
237,504,000 

'""vFor  1898  a  preliminary  estimate  shows  a  product 
valued  at  about  ^80,000,000.  The  prospect  is  that  the 
next  few  years  will  see  equally  large  outputs.  The 
largest  average  annual  product  ever  before  known  was 
6,486,000  ounces,  produced  between  1856  and  1860. 
The  value  of  the  gold  output  alone  is  larger  now  than 
the  combined  values  of  the  annual  gold  and  silver  out- 
put from  1871  to  1875,  when  silver  was  "  demonetized." 
This  is  shown  in  the  following  table,  in  which  the  silver 
product  is  valued  at  the  ratio  of  16"  ounces  for  1  ounce 
of  gold :  — 


Year. 

Silver 

Gold. 

Total. 

1871-1875          1 
Annual  average  j 
1896 
1897 

$81;864,000 

$115,577,000 

202,956,000 
237,504,000 

$197,441,000 

Improvements  in  the  art  of  producing  gold  from 
poorer  ores,  stimulated  by  the  recent  appreciation  of 
gold,  are  likely  to  make  the  product  large  for  many 


j  BIMETALLISM.  303 

years.  In  the  remote  future  it  may  decrease  again  ;  but, 
for  the  present,  arguments  drawn  from  the  scarcity  of 
gold  have  very  much  less  force  than  they  possessed 
before  1890.  The  question  may  arise,  Why  does  not  the 
increased  production  of  gold  lead  to  a  rise  in  prices  ? 
The  explanation  probably  is  that  several  years  are 
required  for  a  change  in  the  annual  output  to  affect  the 
value  of  the  world's  large  stock  of  gold. 

Bimetallism  is  declared  to  be    desirable    because   it 
would  establish  a   fixed  par-of-exchange    between    all 
countries.      An  English    merchant  trading    Arguments 
with  a  silver  standard  country  has  to  sell    fora*lxed 

•>  par-of- 

at  silver  prices.  He  receives  payment  in  exchange, 
bills  drawn  in  terms  of  silver,  and  the  gold  value  of 
these  silver  bills  may  vary  between  the  time  that  goods 
are  sold  and  the  time  that  they  are  paid  for.  Such 
fluctuations  introduce  an  element  of  uncertainty  and 
speculation  into  legitimate  trade  between  gold  and  silver 
standard  countries.  If  gold  and  silver  were  held 
together  at  a  fixed  ratio  by  international  bimetallism, 
then  this  element  would  be  eliminated  from  the  trade 
with  silver-using  nations.  This  may  be  admitted  to  be 
desirable. 

§  196.  The  crucial  consideration  concerning  bimetal- 
lism is  the  question  of  its  practicability.  Bimetallists 
urge  the  following  arguments  :  — 

1:  If  the  principal  nations  of  the  commercial  world 
should  agree  to  allow  free  coinage  of  gold  and  silver  at  a 
fixed  ratio,  say  16  to  1,  both  metals  could  be  kept  in 
concurrent  circulation.     If  either  should  cheapen,  there 


/ 
/ 


304  PRINCIPLES  OF  ECONOMICS. 

would  be  a  general   tendency  for  debts  to  be  paid  in 
that  metal.     The  demand  for  the  cheaper  metal  for  coin- 
age purposes  would  be  as  large  as  the  entire 

Is  interna-  . 

tionai  bimetal-  demand    of    the    commercial    nations    for 

cabiePonCtl"      money.    This  demand  would  raise  the  value 
economic  0f    the    cheapened    metal.      On  the  other 

grounds  ? 

hand,  the  demand  for  the  dearer  metal 
would  fall  in  proportion  as  the  demand  for  the  cheaper 
increased.  World-wide  changes  in  demand  would,  there- 
fore, restore  the  parity  of  the  two  metals  at  the  legal 
ratio. 

2.  This  plan  differs  from  national  bimetallism  since, 
under  the  latter  policy,  the  dearer  metal  could  be 
exported  to  either  gold  or  silver  standard  countries 
where  it  would  be  in  demand  ;  while  the  cheaper  metal 
would  gradually  flow  from  the  countries  that  produced 
it  to  the  mints  of  the  nation  that  overvalued  it.  With 
international  bimetallism,  if  gold  should  become  dearer 
than  silver  at  the  legal  ratio,  it  could  not  be  exported  to 
any  countries  where  the  demand  for  it  would  maintain 
its  higher  value.  This  is  because  all  the  principal  com- 
mercial nations,  now  on  the  gold  standard,  are  supposed 
to  be  in  the  bimetallic  league.  If  one  or  two  should 
refuse  to  enter,  they  would  have  to  maintain  the  value 
of  gold  by  their  individual  demands. 

3.  Bimetallists  assert  that  the  experience  of  France 
from  1803  to  1874  illustrates  the  practicability  of  their 
policy.  During  that  period  France  admitted  both  gold 
and  silver  to  free  coinage  at  the  ratio  of  15.5  to  1. 
From  1803  to  1850  silver  was  usually  slightly  cheaper 


BIMETALLISM.  305 

than  gold  at  that  ratio,  while  from  1850  to  1873  the 
case  was  reversed.  In  every  year  but  one,  both  metals 
were  offered  at  the  French  mints  for  coinage;  although 
the  silver  coinage  exceeded  gold  from  180G  to  1850,  and 
gold  exceeded  silver  from  1850  to  1873.  Conditions  at 
the  present  day  would  not  be  so  favorable  for  another 
experiment  with  national  bimetallism.  Prior  to  1873 
some  countries  of  Europe  used  silver  and  others  gold, 
so  that  the  strain  on  the  French  system  was  lessened. 

§  197.  Gold  monometallists  have  often  showed  that 
national  bimetallism  has  regularly  proved  a  failure, — 
even  France  feeling  obliged  to  change  her  The  position 
policy  in  1876  on  penalty  of  losing  her  gold,  monometai- 
But  such  arguments  fail  to  touch  interna-  Usts- 
tional  bimetallism.  More  pertinently,  monometallists 
argue  that  international  bimetallism  means,  at  the 
present  day,  the  attempt  to  make  gold  and  silver  legal 
tender  at  some  such  ratio  as  15.5  to  1,  16  to  1,  or  20  to 
1.  These  ratios  all  overvalue  silver,  for  the  actual 
market  ratio  is  now  31  to  1  or  32  to  1.  Monometallists 
say,  therefore,  that  the  results  of  international  bimetal- 
lism can  be  determined  by  asking,  What  would  happen 
if  the  governments  of  leading  nations  should  attempt  to 
make  gold  and  silver  legal  tender  at  a  ratio  that  over- 
valued silver?  Their  answer  is  that  gold,  the  dearer 
metal,  would  quickly  cease  to  be  used  as  legal-tender 
money;  and  silver  would  become  the  sole  legal-tender 
money  in  circulation.  They  deny  that  gold  would  fall 
in  value  the  moment  it  ceased  to  be  demanded  as  legal 

tender.     It  would  be  used   first   as   a  commodity,   in 

20 


306  PRINCIPLES  OF  ECONOMICS. 

which  use  its  utility  would  be  unaltered.  Second,  it 
would  circulate  in  payment  of  debts  at  a  premium  over 
the  legal  value  placed  upon  it  at  the  mints.  Mono- 
metallists  recognize  that  governments  can  compel  cred- 
itors to  receive  cheap  silver  money  for  past  debts,  but 
deny  that  the  commercial  world  can  be  forced  by  law  to 
use  it  in  future  payments.  Gold  has  gradually  dis- 
placed silver  as  the  medium  for  the  largest  commercial 
transactions  because  of  its  superior  convenience.  At 
the  present  time  the  commercial  world  dislikes  and  dis- 
trusts silver,  and  would  refuse  to  make  future  contracts 
in  that  money.  Consequently  gold  would  be  demanded 
for  future  payments,  and  future  contracts  would  be 
made  in  terms  of  ounces  or  grains  of  gold.  In  other 
words,  monometallists  insist  that  the  commercial  world 
would  choose  its  own  money  ill  future  payments,  with- 
out regard  to  legal-tender  laws.  They  assert  that  the 
laws  making  gold  legal  tender  have  little  power  to  affect 
its  value,  since  it  would  be  used  as  money  by  the  com- 
mercial world  without  such  legislation.  The  law  should 
recognize  this  fact.  In  any  case  legal-tender  laws 
would,  in  the  end,  prove  powerless  to  overcome  this 
preference.  Thus  international  bimetallism  would  fail 
at  the  outset. 

§  198.    The  practicability  of  bimetallism  turns  finally 

on  this  last  point  raised  by  the  gold  monometallists.     If 

concluding       an  international   agreement  should   induce 

considerations.  f.]ic  i)US;llcss  world  to  make  future  contracts 

in  either  gold  or  silver  at  a  fixed  legal  ratio,  then  it  ia 

probable  that  the  changes  in  the  demand  for  the  two 


BIMETALLISM.  807 

metals  would  maintain  them  at  a  parity  for  a  long  time, 
at  least.  But,  if  the  commercial  world  should  refuse  to 
make  future  contracts  in  the  bimetallic  standard,  the 
outcome  would  depend  upon  whether  this  demand  of 
business  circles  should  prove  sufficient  to  maintain  gold 
at  a  ratio  higher  than  that  fixed  by  law.  It  seems  im- 
probable, however,  that  there  should  be  sufficient  dis- 
crimination against  silver  to  produce  such  a  result. 
International  bimetallism  could  hardly  be  adopted  un- 
less the  commercial  interests  of  leading  countries  should 
favor  it.  In  the  nature  of  the  case,  therefore,  there 
would  hardly  be  sufficient  discrimination  against  silver 
to  maintain  the  value  of  gold  above  the  legal  ratio. 

§  199.  It  is  necessary  to  add  that  the  political  diffi- 
culties in  the  way  of  an  international  bimetallic  agree- 
ment are  considerable.  It  is  doubtful  whether    _  „  .   . 

Political 

such  an  agreement  could  be  secured  in  any  obstacles  to 
near  future.  More  than  this,  the  outbreak 
of  war  between  two  of  the  states  of  a  bimetallic  league 
might  lead  each  of  the  contending  nations  to  make  a 
sudden  attempt  to  secure  gold,  the  metal  in  which  most 
reliance  could  be  placed.  As  a  matter  of  fact,  political 
considerations,  especially  those  of  a  military  nature, 
have  been  partly  responsible  for  the  movement  of  Euro- 
pean countries  toward  the  single  gold  standard. 


308  PRINCIPLES  OF  ECONOMICS. 


LITERATURE   ON  CHAPTER  X. 

References  on  the  Monetary  History  of  the  United  States  : 
Andrews,  Institutes  of  Economics,  200-217  ;  Atkinson,  Bimetal- 
lism in  Europe ;  Bolles,  Financial  History  of  the  United  States  ; 
Coinage  Laws  of  the  United  States;  Conant,  History  of  Modern 
Banks  of  Issue;  Dunbar,  Theory  and  History  of  Banking;  Dun- 
bar, Laws  of  the  United  States  Relating  to  Currency,  Finance, 
and  Banking ;  Knox,  United  States  Notes ;  Laughlin,  History 
of  Bimetallism  in  the  United  States;  Muhleman,  Monetary  Sys- 
tems of  the  World;  Report  of  the  Director  of  the  Mint,  1895:, 
Statistical  Abstract  of  the  United  States,  1895 ;  Sumner,  History 
of  American  Currency;  Sumner,  History  of  Banking  in  the  United 
States  ;  Taussig,  The  Silver  Situation  in  the  United  States; 
Upton,  Money  in  Politics ;  Noyes,  Thirty  Years  of  American 
Finance  ;  Report  of  the  Monetary  Commission  of  the  Indianapolis 
Convention,  138-145,  197-223,  398-490,  491-582 ;  Watson,  History 
of  American  Coinage  ;  White,  Money  and  Banking. 

References  on  Bimetallism  :  Atkinson,  Bimetallism  in  Europe  ; 
Ely,  Outlines  of  Economics,  150-156  ;  Fisher,  Appreciation  and 
Interest ;  Giffen,  The  Case  against  Bimetallism ;  IIadley,  Eco- 
nomics, 206-231;  Helm,  The  Joint  Standard;  Horton,  Silver  in 
Europe;  Laughlin,  Bimetallism  in  the  United  States ;  Macvane, 
Political  Economy,  165-181 ;  Muhleman,  Monetary  Systems  of  the 
World  ;  Nicholson,  Money  and  Monetary  Problems;  Report  of  the 
Director  of  the  Mint,  1895;  Reports  of  the  Monetary  Conferences 
of  1878  and  1892;  Statistical  Abstract  of  the  United  States,  1895; 
Taussig,  Silver  Situation  in  the  United  States ;  Walker,  Inter- 
national Bimetallism,  Political  Economy,  463-475,  Money;  Wells, 
Recent  Economic  Changes,  114-259  ;  White,  Money  and  Banking; 
Darwin,  Bimetallism;  Nicholson,  Principles  of  Political  Econ- 
omy, II.  148-163. 


MONOPOLIES  AND  MONOPOLY    VALUE.  309 


CHAPTER  XI. 

MONOPOLIES. 
I.  The  Nature  of  Monopolies.    Monopoly  Value. 

§  200.  A  monopoly  exists  whenever  one  person  or  a 
combination  of  persons  acquires  control  of  the  supply  of 
a  commodity.  This  control  may  be  secured  Definition  of 
temporarily  by  buying  up  the  available  sup-  monopoly, 
ply,  or  more  permanently  by  gaining  the  exclusive  or 
nearly  exclusive  power  to  produce.  A  monopoly  of  the 
first  kind  will  be  a  temporary  affair,  because  producers 
will  increase  their  outputs  in  order  to  profit  by  the 
higher  prices  usually  fixed  by  monopolists.  With  the 
second  class  of  monopolies  permanent  success  is  more 
probable.1 

§  201.    When  a  single  person  or  combination  of  per- 
sons controls  the  supply  of  any  commodity,  it  is  possi- 
ble to  control  the  price.     This  can  be  done  Monopoly 
by  increasing  or  decreasing  the  supply  so  value- 
as  to  induce  the  public  to  buy  at  prices  that  shall  make 
the   business    as   profitable   as   possible.     With   freely 

1  Sonic  monopolies  have  been  the  sole  purchasers  of  the  raw  materials 
used  by  them.  Their  influence,  therefore,  has  extended  to  a  control  of 
the  prices  at  which  the  producers  of  the  raw  materials  must  dispose  of 
their  products.  Such  monopolies  have  a  substantial  control  of  the  demand 
for  the  raw  materials. 


310  PRINCIPLES  OF  ECONOMICS. 

produced  commodities  no  person  is  able  to  control  the 
supply,  hence  the  price,  in  this  manner.  If  he  reduces 
his  output,  other  producers  will  extend  their  sales  at 
his  expense.  He  must  sell  as  many  goods  as  can  be 
disposed  of  at  prices  that  leave  a  profit  after  paying 
expenses.  Thus  in  competitive  industries  producers 
will  make  the  largest  profits  by  extending  production 
until  prices  approximate  the  marginal  expenses  of  pro- 
duction. Now  the  monopolist  acquires  the  power  to 
control  the  supply.  Monopoly  prices,  therefore,  will 
not  be  governed  by  the  forces  that  control  prices  of 
freely  produced  commodities. 

A  person   may  acquire  power  to  fix  the  price  of  a 

commodity  without   controlling   all    the    supply.      Re- 

Monoponsts      peated  instances  have  shown  that  control  of 

teoftheVntire  ovcr  na^  the  suPPty  maJ  enable  a  monopo- 
suppiy.  list   to   dictate   prices.      As    Mr.   Sidgwick 

says,  "  a  partial  control  may  render  possible  and  prof- 
itable an  artificial  rise  in  the  price  of  the  commodity, 
even  though  the  remainder  is  supplied  by  several  sell- 
ers freely  competing ;  if  only  the  proportion  controlled 
is  so  large  that  its  withdrawal  would  cause  a  serious 
scarcity,  and  thus  considerably  raise  the  competitively 
determined  value  of  the  uncontrolled  remainder." 

Monopoly   prices  tend  to  be  adjusted  so  as  to  yield 

the  monopolist  the  largest  net  income.     In  determining 

Monopoly        what  price  will  vield  the  highest  net  return, 

prices  are  ■  J  ° 

fixedatthe     the  following  principles  may  be  recognized: 
est  net  return.      1-  -^s  the  monopolist  decreases  the  sup- 
ply, he    tends  to   increase  the   marginal  utility  of   his 


MONOPOLIES  AND  MONOPOLY  VALUE.  311 

product ;  and  vice  versa.  The  rapidity  with  which  mar- 
ginal utility  varies  with  changes  in  supply  depends  upon 
the  character  of  the  demand.  The  demand  for  luxuries 
is  far  more  elastic  than  the  demand  for  necessaries  ;  so 
that  changes  in  supply  affect  the  marginal  utility  of 
necessaries  more  rapidly  than  they  affect  the  utility  of 
luxuries  (§  116). 

2.  Certain  expenses  of  production  will  increase  or 
decrease  nearly  proportionately  with  each  increase  or 
decrease  of  the  product.1  Expenses  for  raw  materials 
and  common  wages  are  of  this  character. 

3.  Other  expenses  remain  nearly  the  same  whether 
the  product  is  larger  or  smaller,  within  certain  limits. 
These  are  fixed  expenses  (§  127). 

4.  The  intelligent  monopolist,  desiring  to  secure 
the  maximum  net  revenue,  will  disregard  any  expenses 
that  are  fixed  ;  and  will  consider,  first,  the  quantity  of 
his  product  demanded  at  various  prices,  and  second,  the 
variable  expenses  for  each  unit  of  supply.  Suppose 
that  the  fixed  annual  expenses  of  a  street  railway  com- 
pany for  interest  on  borrowed  capital,  for  salaries  of 
principal  officials,  and  for  other  outlays  that  do  not 
vary  with  the  amount  of  business  transacted,  are 
$40,000.  Suppose  that  the  variable  expenses  amount 
to  two  cents  for  each  passenger  carried.     Then  suppose 

1  In  some  cases  these  expenses  will  increase  more  than  proportion- 
ately when  the  supply  is  increased  beyond  a  certain  point.  This  is  true 
of  industries  in  which  the  point  of  diminishing  returns  is  quickly  reached, 
so  that  the  increased  supply  of  raw  materials  has  to  be  produced  on  new 
lands  that  offer  poorer  advantages.  Sometimes  a  supply  can  he  some- 
what increased  without  increasing  the  variable  expenses  proportionately. 


312 


PRINCIPLES   OF  ECONOMICS. 


that,  at  a  fare  of  ten  cents,  600,000  passengers  will  be 
carried  in  the  course  of  a  year ;  and  that  each  reduc- 
tion of  fares  brings  a  larger  traffic,  as  represented  in  the 
table  given  below.  The  effect  of  each  change  of  fare  upon 
the  net  revenue  of  the  company  will  be  as  follows  :  — 


Passengers 

Total 

Variable 

Net 

Fixed 

Net 

Carried. 

Earnings. 

Expenses. 

Earnings. 

Expenses. 

Revenue. 

10 

600,000 

$60,000 

$12,000 

$48,000 

$40,000 

$8,000 

8 

800,000 

64,000 

16,000 

48,000 

40,000 

8,000 

6 

1,400,000 

84,000 

28,000 

56,000 

40,000 

16,000 

5 

2,000,000 

100,000 

40,000 

60,000 

40,000 

20,000 

4 

2,500,000 

100,000 

50,000 

50,000 

40,000 

10,000 

3 

4,000,000 

120,000 

80,000 

40,000 

40,000 

5.  The  intelligent  monopolist  will  not  charge  the 
highest  prices  that  he  could  compel  any  consumer  to 
pay.  He  will  lower  prices  whenever  the  increased  de- 
mand will  more  than  counterbalance  the  reduction  of 
rates  and  the  increase  of  variable  expenses.  In  our 
illustration,  five  cents  is  the  fare  that  yields  the  largest 
net  returns.  Furthermore,  the  fixed  charges  have  no 
influence  upon  the  prices.  If  a  fixed  tax,  say  of 
$10,000  a  year,  should  be  exacted,  the  fare  would  not 
be  raised ;  for  such  a  course  would  diminish  the  net 
earnings  out  of  which  all  fixed  charges  must  be  paid, 
and  the  tax  would  come  out  of  the  net  monopoly 
revenue.  On  the  other  hand,  a  variable  tax,  say  of  one 
cent  for  each  passenger,  would  increase  the  variable 
expenses  so  that  a  fare  of  six  cents  would  yield  the 
largest  net  returns.  Taxes  on  the  net  revenue  of 
monopolies  cannot  be  shifted. 


CLASSES  OF  MONOPOLIES.  313 

II.  Classes  of  Monopolies. 

§  202.  A  monopoly  may  originate  in  the  possession 
of  rare  personal  faculties  and  acquirements.  Every 
free  person  has  exclusive  disposal  of  his  i.  personal 
natural  or  acquired  powers  ;  but  if  many  ablllUes- 
other  people  possess  the  same  faculties  in  an  equal  de- 
gree, no  one  can  have  a  monopoly,  that  is,  a  control  of 
the  supply  of  the  services  that  his  personal  abilities 
enable  him  to  render.  On  the  other  hand,  exceptional 
ability  that  very  few  other  people  possess  confers  upon  a 
person  a  substantial  monopoly  in  the  field  in  which  his 
talents  lie.  A  famous  singer,  an  exceptional  physician, 
an  author  of  peculiar  talent,  or  a  business  manager  of 
unusual  ability  may  enjoy  a  partial  or  nearly  complete 
monopoly  of  the  supply  of  valuable  services. 

§  203.    Other  private  monopolies  arc  created  by  law. 
Formerly  kings  granted  to  private  individuals  monopo- 
lies of  many   trades  and    manufactures   in  2.  Legal 
return  for  payments  to  royal  treasuries.     At  ™°private 
the  present  day  patents  and  copyrights  are  monopoues. 
forms  of  legal  monopolies.     These  are  intended  to  pro- 
mote invention   and  the  arts  by  securing  to  inventors 
and  authors  exclusive  rights   to   their   products   for   a 
limited    period   of   time.     Giant  monopolies  have  been 
created  behind  patent  rights,  as  the  telephone  monopoly 
in  the  United  States. 

Governments  may  create  public  monopolies  of  certain 
industries  for  the  purpose  of  deriving  revenue  from  such 
sources.     Fiscal  monopolies  of  this  character  still  exist 


314  PRINCIPLES   OF  ECONOMICS. 

in    Europe,  where   the    manufactures  of   tobacco,  salt, 

Legal  and  matches  are  carried  on  exclusively  for 

™0ptiMiceS      *ne    profit   0I"   various    governments.      The 

monopolies.       United  States  has  a  monopoly  of  the  postal 

business,  —  a  monopoly,  however,  which  is  not  made  a 

source  of  revenue. 

§  204.   The  use  of  land,  of  mines,  or  of  water  privi- 
leges, is  necessary  to  production.     Some  of  these  nat- 
ural  agents  are   narrowly  -limited   in   sup- 

3.  Natural  ,  ,  .,     .  ■, 

monopolies.      W  >    hence  it  is  easy,   so   long  as  private 
a.  Monopolies  ownership  is  allowed,  to  monopolize  them. 

of  location.  ^  '  r 

Practically  all  of  the  anthracite  coal  of  the 
United  States  is  found  in  a  small  area  in  Pennsylvania, 
and  it  has  been  possible  for  the  ownership  of  these  coal 
fields  to  pass  into  the  hands  of  a  monopoly.  Similarly, 
the  petroleum  fields  are  in  process  of  monopolization. 
Water  powers,  facilities  for  irrigation,  and  docks  giv- 
ing access  to  navigable  waters  are  often  monopolized. 
Steam  railroads  sometimes  possess  terminal  facilities  in 
large  cities  that  cannot  be  duplicated,  and  therefore  tend 
to  create  monopolies.  In  some  instances  street  railroads 
have  been  granted  locations  in  peculiarly  desirable  streets, 
so  that  they  monopolize  the  larger  part  of  the  business  of 
their  cities.  Steam  railroads,  when  granted  rights  of 
way  through  mountain  passes  or  narrow  river  valleys, 
possess  practically  exclusive  channels;  of  communication 
between  different  sections  of  a  country.  In  these  cases, 
monopolies  control  the  supply  of  commodities  or  services 
on  account  of  exclusive  advantages  of  location. 

A  second  group  of  natural  monopolies  originates  in 


CLASSES   OF  MONOPOLIES.  315 

the  necessity  of  consuming  products  or  services  in  con 
nection  with  the  plants  from  which  they  are  Natural 
supplied,     das,  water,  and  electric  light  can  "^ono^ues 
be  supplied  to  consumers  only  bv  extending  duetocon- 

.  sumption  of 

pipes  and  wTires  to  places  where  the  coin-  products  in 
modities  are  used.  Such  things  can  be  se-  ^"uT^011 
cured  only  from  companies  owning  plants  plants. 
in  the  immediate  locality  where  consumers  live.  The 
same  is  true  of  steam  and  street  railroad  facilities. 
Such  services  cannot  be  supplied  by  all  producers,  and 
cannot  be  imported  from  another  city  except  by  exten- 
sion of  the  plants.  It  follows  that,  if  two  gas  or  electric- 
light  or  water  companies  attempt  to  compete  for  the 
trade  of  a  particular  locality,  a  large  part  of  the  capital 
fixed  in  the  rival  plants  will  be  needlessly  duplicated 
One  company  can  supply  the  entire  demand  of  a  city  far 
more  cheaply  than  two  can  do.  The  same  is  true  when 
parallel  lines  of  railroad  compete  for  the  traffic  between 
two  cities.  Between  such  points  one  company  can  give 
better  and  cheaper  service  than  two.  Whenever  compe- 
tition is  tried  in  these  businesses,  the  rival  companies 
combine  sooner  or  later  to  form  a  monopoly.  It  will  be 
difficult  for  readers  to  find  cases  where  effective  compe- 
tition has  been  maintained  permanently  in  the  water,  or 
gas,  or  electric-lighting  business.  The  same  is  true  of 
the  telegraph  or  telephone  business,  while  parallel  rail- 
roads have  usually  been  combined.  In  these  natural 
monopolies,  it  has  generally  proved  that  competition  re- 
sults in  economic  waste  through  needless  duplication  of 
plants;  that  competing  companies  cannot  give  as  cheap 


316  PRINCIPLES   OF  ECONOMICS. 

and  satisfactory  service  as  a  single  company  ;  and  that 
the  usual  outcome  is  the  formation  of  a  monopoly. 

§  205.  During  the  last  twenty  years  the  business 
world  has  been  startled  by  the  growth  of  giant  monopo- 
4.  capitalistic  l'es  m  many  industries  that  do  not  ap- 
monopoues.  parently  fall  under  any  of  the  classes  of 
undertakings  previously  described.  There  is  hardly  an 
important  industry  in  which  attempts  have  not  been 
made  to  establish  combinations.1 

The  simplest  attempts  to  form  monopolies  consist  of 

agreements  between  a  number  of  producers  to  limit  the 

product,  to  maintain  fixed  prices,  or  to  ap- 

Forms  of  I  l  l 

organization,   point  common  selling-agents.     These  agree- 

.A.  2X6  &m  6H  t  s 

pools,  and  '     ments  are  seldom  lived  up  to,  and  mutual 
trusts.  suspicion    among    the    members    generally 

breaks  them  up.  Yet  a  "  friendly  agreement  "  between 
four  large  beef  packers  in  Chicago  has  sufficed  to  build 
up  a  practical  monopoly  of  the  cattle  and  meat  business 
of  the  United  States.  In  other  cases,  where  the  number 
of  parties  to  the  agreement  has  been  small,  this  form  of 
combination  has  created  virtual  monopolies.  A  second 
and  more  formal  organization  is  the  "  pool."  This  is 
established  by  a  formal  agreement  to  maintain  prices,  in 
which  the  parties  agree  to  divide  the  territory,  to  divide 
the  business,  or  to  divide  the  earnings.  Pools  have  been 
common  in  the  railroad  business,  but  have  existed  else- 
where, as  in  cases  where  nominally  competing  gas  cora- 

1  See  Von  Halle,  "Trusts."  328-337  ;  Lloyd,  "  Wealth  against  Com- 
monwealth," Appendix,  —  for  partial  lists  giving  about  four  huudred  at- 
tempts  to  form  monopolies. 


CLASSES   OF  MONOPOLIES.  317 

panies  agree  to  servo  separate  districts  in  a  city,  and  not 
to  encroach  upon  each  other's  territory.  Pools  have 
often  enough  been  broken  up  by  the  mutual  distrust  of 
the  members  ;  for,  if  one  party  to  the  pooling,  agreement 
breaks  it  while  the  others  keep  their  promises,  he  may 
make  large  profits.  This  difficulty  is  intensified  in  this 
country  because  the  courts  have  refused  to  enforce  pool- 
ing contracts,  regarding  them  as  in  restraint  of  trade 
and  opposed  to  public  policy.  In  a  third  form  of  com- 
bination, the  trust,  monopolists  finally  secured  perma- 
nent understanding  and  union  of  interests  among  all 
members.  Trusts  were  formed  by  having  competing 
corporations  place  a  majority  of  all  their  stock  in  the 
hands  of  a  board  of  trustees.  These  trustees  managed 
the  business  of  the  several  corporations,  and  secured 
harmony  of  action.  The  original  stockholders  received 
trust  certificates  in  exchange  for  their  stock,  and  re- 
ceived dividends  proportionate  to  the  certificates.  The 
Standard  Oil  Trust,  formed  in  1882,  was  the  earliest  and 
most  successful  trust.  Courts  finally  decided  that  cor- 
porations had  no  right  to  surrender  their  stock  to  trus- 
tees, such  action  being  ultra  vires.  Between  1888  and 
1892  many  states  passed  "  anti-trust  laws,"  and  Congress 
placed  such  an  act  upon  the  statutes  of  the  United  States. 
This  hostility  of  the  courts  and  of  public  opinion  led  to  a 
formal  dissolution  of  trusts.  But  dissolution  meant 
simply  a  change  of  form.  In  some  cases,  one  large  cor- 
poration bought  out  the  smaller  corporations  composing 
the  trust.  In  others,  a  few  large  corporations  were 
formed,  in  each  of  which  the  original  monopolists  owned 


318  PRINCIPLES   OF  ECONOMICS. 

a  majority  of  the  stock.     The  Standard  Oil  Combination 
now  operates  in  this  form. 

The  formation  of  monopolies  in  nearly  all  industries 
has  been  attributed  to  the  influence  of  modern  capital- 
istic production  ;  hence  the  name  capitalistic 

Nature  of  r  1 

capitalistic  monopolies.  The  striking  facts  of  modern 
monopo  es.  mismess  are  the  growth  of  large  capitals-  and 
the  concentration  of  production  (§  100  to  §  103).  It  is 
alleged  that  the  formation  of  monopolies  in  industries 
where  large  fixed  capitals  are  required  is  the  natural  re- 
sult of  the  forces  that  have  led  to  the  replacement  of 
small  establishments  by  large  enterprises. 

III.  General  Considerations  Concerning  Modern  Monopolies. 

§  206.    Combinations  of  various  sorts,  enjoying  partial 

or  nearly  complete  monopolies,  are  attempting  to  control 

_  .    .  .        the   national    markets   for    sugar,  matches. 

Extent  of  &      '  ' 

monopoly  starch,  beef,  flour,  alcohol,  tobacco,  crackers, 
coal,  petroleum,  cotton-seed  oil,  linseed  oil, 
glass,  paper,  rubber,  leather,  steel  rails,  wire  nails,  tacks, 
shovels,  chains,  anthracite  coal,  and  other  products  j 
while  local  monopolies  exist  in  many  other  industries. 
In  the  field  of  the  natural  monopolies  there  are  tele- 
graph, telephone,  and  express  monopolies,  organized  on 
a  national  scale ;  while  the  gas,  street  railway,  water 
supply,  and  electric-lighting  industries  are  given  up  to 
local  monopolies  or  operated  as  municipal  enterprises. 
The  consolidation  of  railways  is  rapidly  throwing  tho 
control  of  the  national  highways  into  the  hands  of  a  few 


CLASSES  OF  MONOPOLIES.  319 

great  railroad  systems.  We  must  realize,  therefore,  that 
monopoly  is  one  of  the  common  facts  of  modern  busi- 
ness, and  that  its  influence  for  good  or  for  bad  reaches 
into  nearly  all  branches  of  economic  activity. 

§  207.    Most  of  these  combinations  possess  several  of 
the  elements  that  produce  monopolies.     The  Standard 

Oil    Combination    claims    to    have    valuable 

Complexity 

patents  that  have  cheapened  and  improved  of  these 
its  products,  and  possesses  elements  that  monopo  ^ 
make  it  a  legal  monopoly.  Also  it  claims  to  have  real- 
ized all  the  economies  that  come  from  production  on  a 
large  scale,  and  so  would  be  considered  a  capitalistic 
monopoly.  Again,  it  has  been  greatly  aided  by  its  ex- 
clusive control  of  the  pipe  lines  that  conduct  oil  from  the 
oil  fields.  Since  the  oil  fields  are  limited  natural  agents, 
the  possession  of  the  pipe  lines  introduces  elements  of 
natural  monopoly.  These  features  are  common  to  most 
monopolies. 

§  208.    Many  natural  monopolies  have  been  given  ex- 
clusive franchises  that  make  them  legal  monopolies  as 

well  as  natural.     It  has  been  denied  that  the  __, .  _.^ 

Denials  of  the 

other  combinations  are  monopolies,  since  existence  of 
they  do  not  possess  any  legal  grants  of  ex- 
clusive privileges.  But  such  a  denial  rests  upon  a  nar- 
row definition  that  confines  monopoly  to  the  meaning  of 
a  legal  monopoly.  Even  then,  a  patent  right  would  be 
admitted  to  be  a  monopoly  privilege  ;  and  most  combina- 
tions are  intrenched  behind  patents.  But  the  real  test 
of  a  monopoly  is  the  power  to  control  the  supply,  and  this 
originates  in  other  causes  besides  exclusive  legal  grants. 


320  PRINCIPLES   OF  ECONOMICS. 

§  209.    An  absolute  monopoly,  or  absolute  control  of 
supply  and  prices,  seldom  or  never  exists.     The  power 
Absolute  mo-    of  the  monopolist  is  limited,  first,  by  the  fact 
sn£e  in  most"  tna*  ^s  °^en  possible  for  consumers  to  find 
cases.  substitutes  for  the  monopolized  commodity. 

The  possibility  of  using  oil  limits  the  power  of  the  gas 
monopoly,  and  the  alternative  of  using  other  foods  would 
limit  the  power  of  a  flour  monopoly.  If  the  article 
monopolized  is  not  a  necessary,  people  might  cease  to 
use  it  at  all,  and  thus  an  increased  price  might  be  un- 
profitable. Finally,  every  monopoly  is  threatened  con- 
stantly by  investments  of  new  capital  in  the  business 
which  it  controls.  As  prices  are  raised,  inducements 
for  outsiders  to  invest  capital  are  increased.  It  often 
pays  better  to  keep  prices  from  becoming  so  high  as  to 
tempt  outside  capitalists. 

IV.   The  Problem  of  Natural  Monopolies. 

§  210.    Disinterested    writers    practically    agree   that 

permanent  competition  is  impossible  in  industries  that 

impossibility    are  natural  monopolies.     The  reasons  have 

of  competition  |jccn    ma(je  c|ear     an(j   it  remains  to  refer 

in  natural 

monopolies,      to  the  public  policy  that  should  be  pursued 

in  respect  to  these  undertakings. 

§  211.    Persons  interested  in  water,  gas,  street  railway, 

electric  lighting,  and  railroad  companies  sometimes  urg0" 
Private  own-  *ina*  Pr'vaTC  ownership  generally  works  well, 
ershipand       and  is  flic  best  policv  for  the  future;  that 

public  control. 

the  law  should  leave  private  companies  alone, 
since  it  is  for  the  interest  of  the  owners  of  such  property 


NATURAL  MONOPOLIES.  321 

to  give  the  best  service  at  reasonable  prices.  But  tlia. 
public  lias  found  that  these  industries  usually  become 
monopolies,  and  that  there  have  been  many  abuses  in 
their  management.  Such  enterprises  prove  very  profit- 
able in  the  long  run,  and  become  more  valuable  with 
every  increase  of  population  and  public  wealth.  Expe- 
rience shows  that  private  companies  usually  keep  rates 
at  the  point  that  yields  the  highest  net  returns,  and 
conceal  the  large  profits  by  means  of  stock  waterings 
Now,  such  monopolies  depend  upon  franchises  secured 
from  the  public,  and  people  are  inclined  to  hold  that 
companies  receiving  valuable  privileges  should  not  exact 
monopoly  prices  and  realize  enormous  profits  at  the  I 
expense  of  the  public  that  confers  the  right  to  use  streets, 
to  lay  pipes,  etc.  Municipalities  have  begun  to  regulate 
natural  monopolies.  The  present  tendency  is  to  require 
reasonable  prices  and  good  service,  to  prevent  stock 
watering  and  the  concealment  of  profits,  and  to  oblige 
private  corporations  to  pay  for  valuable  franchises.  This 
tendency  is  of  recent  development,  and  too  often  valuable 
franchises  have  been  given  away  to  private  companies 
that  have  oppressed  the  public. 

§  212.  Many  authorities  favor  public  ownership  of 
natural  monopolies.  Such  writers  call  attention  to  the 
notorious  corruption  of  city  and  state  officials 

1  •  The  policy 

by  private   corporations    desiring  to  secure  of  public 
franchises.      They    demonstrate   that  enor- 
mous   wastes    have    occurred    through     allowing    rival 
companies  to  duplicate  business  plants,  and  that  usually 
the  competing  companies  have  consolidated  and  formed 

21 


322  PRINCIPLES   OF  ECONOMICS. 

monopolies.  They  show  that  the  monopoly  prices  charged 
by  private  companies  are  often  excessive,  and  form  a 
public  burden.  Therefore,  they  hold  that  sound  policy 
requires  that  we  should  recognize  competition  to  be 
impossible  in  these  industries  ;  that  municipalities  should 
assume  ownership  of  these  enterprises  as  fast  as  possi- 
ble ;  and  that  such  a  policy  would  diminish  the  political, 
corruption  that  threatens  the  governments  of  all  the 
municipalities  of  the  country. 

To  this  the  advocates  of  private  ownership  object  that 
public  ownership  is  socialistic  ;  that  city  governments 
Arguments  cannot  manage  business  enterprises  success- 
private™  fully ;  and  that  poor  and  expensive  service 
ownership,  would  result.  The  charge  that  municipal 
ownership  is  socialistic  is  as  true  as  the  charge  that 
municipal  ownership  of  streets,  parks,  and  sewers  is 
socialistic.  The  public  cares  nothing  about  the  name 
used  to  characterize  municipal  ownership,  but  will  con- 
sider the  results.  Many  cities  own  water  works,  parks, 
public  libraries,  and  many  other  institutions  that  are 
socialistic  ;  and  find  such  a  policy  beneficial.  The  second 
charge  is  important.  Under  inefficient  methods  that 
often  prevail  in  our  city,  state,  and  national  govern- 
ments, public  ownership  would  prove  less  efficient 
than  private  ownership  at  its  best.  Yet  there  is  no 
need  of  municipal  management  proving  inefficient  if 
people  seriously  desire  to  secure  efficient  municipal 
governments. 

Many  European  cities  manage  successfully  local  mo- 
nopolies.   In  this  country  hundreds  of  municipalities  own 


NATURAL  MONOPOLIES.  323 

their  water  works,  and  manifest  a  desire  to  extend  public 
ownership.  Gas  works  are  owned  by  a  few  Experiments 
cities,  while  municipal  ownership  of  electric-  municipal 
lighting  plants  is  more  common.  The  results  ownership, 
of  public  ownership  of  gas  and  electric-lighting  plants  have 
been  that  some  undertakings  have  been  very  successful, 
others  have  proved  fairly  satisfactory,  as  much  so  as 
average  private  ownership,  while  some  have  been  poorly 
conducted.  Success  or  failure  has  usually  depended  upon 
local  conditions,  generally  upon  the  possibility  of  securing 
honest  local  government.  In  cities  where  municipal  offi- 
cials are  allowed  to  plunder  the  public,  it  is  probable  that 
municipal  ownership  would  prove  less  successful.  It  has 
been  demonstrated  that  natural  monopolies  are  usually 
enormously  profitable  when  private  companies  are  allowed 
to  fix  rates,  while  municipal  ownership  furnishes  lighting 
facilities  at  lower  prices  than  private  companies  usually 
charge.  Little  has  been  done  in  the  direction  of  public 
operation  of  street  railways  in  this  country.  Advocates 
of  public  ownership  hold  that  at  present  it  may  be 
advisable  for  municipalities  merely  to  limit  franchises  for 
street  railroads  to  periods  of  twenty  or  thirty  years,  and  to 
make  private  companies  pay  a  fair  return  for  the  privi- 
leges granted  them,  or  reduce  fares  to  about  a  three-cent 
basis.  Large  cities  could  undoubtedly  pay  a  large  part  of 
their  expenses  out  of  the  receipts  from  public  franchises, 
or  could  insist  upon  material  reductions  in  the  prices 
charged  by  natural  monopolies.1 

1  For  the  experience  of  municipalities   with  the  ownership  of  such 
monopolies,  see:  Shaw,  Municipal  Government  in  Great  Britain,  Muni- 


324  PRINCIPLES   OF  ECONOMICS. 

Steam  railroads  are   natural   monopolies,  since  they 

enjoy  monopolies  of   location,  and  since  their  services 

must  be  used  in  connection  with  their  plants. 
The  case  of 
steam  Competition  is  possible  only  at   competing 

raUroads.  .    ,  1     j     1  j_i  v  c 

points  reached  by  more  than  one  line  01 
road.  But  railroads  possess  also  the  characteristics  of 
capitalistic  monopolies  since  they  require  heavy  invest- 
ments of  fixed  capital,  and  therefore  make  it  possible  to 
effect  savings  by  combining  small  roads.  Public  owner- 
ship of  railroads  presents  many  more  difficulties  than 
municipal  ownership  of  local  monopolies.  But  experi- 
ence shows  that  private  ownership  results  in  serious 
evils.  The  chief  of  these  have  been,  dishonest  manage- 
ment by  a  ring  of  speculators,  stock  watering  and  over- 
capitalization so  great  as  to  make  it  impossible  for  many 
roads  ever  to  pay  interest  and  dividends  on  their  excess- 
ive capitalization,  and  discriminations  in  rates  that  have 
ruined  individuals  and  localities  in  the  interest  of 
favored  shippers  or  localities.  Realizing  these  evils, 
the  public  has  insisted  that  the  states  and  the  national 
government  shall  exercise  control  over  the  transpor- 
tation business.  This  control  has  constantly  increased, 
and  is  certain  to  be  enlarged  in  the  future.  Apparently, 
the  people  of  the  United  States  intend  to  try  all  other 
methods  of  public  control  of  the  national  highways  be- 
fore attempting  national  ownership. 

cipal  Government  in  Continental  Europe ;  Roskwatek,  Cost  Statistics  of 
Public  Electric  Lighting  ;  Bbhis,  Municipal  Ownership  of  Gas  in  the 
United  States;  Jamks,  Relation  of  the  Modern  Municipality  to  the  Gas 
Supply;  Review  of  Reviews,  vii.  61-70. 


CAPITALISTIC  MONOPOLIES.  325 

V.   Capitalistic  Monopolies. 

§  213.    Capitalistic  monopolies  are  so  numerous  and 
powerful    that  they   must    be  considered    a  Reasons  for 
common  feature  of  the  economic  life  of  to-  ^X£of 
day.     Different  reasons  have  been  assigned  monopolies, 
for   their  growth,   and  we  must  consider  the  explana- 
tions advanced. 

§  214.  It  is  said  that  modern  competition  has  become 
fiercer  than  ever  before.  The  growth  of  large  capitals 
narrows  the  competing  parties  down  to  a  The  wastes 
few  large  competitors.  Enormous  sums  are  ^feC^J"fnous 
spent  in  advertising  and  selling  goods,  so  competition, 
that  competition  produces  great  wastes  in  effecting  sales. 
A  union  of  competing  firms  saves  these  expenses,  and 
enables  goods  to  be  sold  at  lower  prices.  Competition 
docs  not  mean  lower  prices,  for  the  wastes  incurred 
under  it  oblige  prices  to  be  kept  at  a  higher  level. 
Furthermore,  competition  between  large  enterprises 
often  becomes  commercial  warfare.  Competing  firms 
sell  goods  for  less  than  cost  in  order  to  crush  out  com- 
petition and  to  extend  their  markets.  This  cut-throat 
competition  sometimes  lasts  for  mouths  or  even  years. 
In  the  end  smaller  concerns  are  forced  to  the  wall,  and 
the  large  companies  remaining  combine  their  forces  in 
order  to  prevent  ruinous  competition  in  the  future. 
Undoubtedly  the  desire  to  stop  these  enormous  losses 
lias  led  to  the  formation  of  many  combinations.  Finally, 
whenever  large  fixed  capitals  are  invested  in  a  business, 
it  is  difficult  for  independent  establishments  to  reduce 


326  PRINCIPLES   OF  ECONOMICS. 

their  outputs  whenever  the  supply  becomes  so  great  as  to 
lower  prices  below  the  point  where  they  cover  expenses 
of  production  (§  127).  Such  conditions  favor  the  forma- 
tion of  combinations,  which  can  reduce  the  output  of 
each  establishment,  and  restore  paying  prices. 

§  215.  A  second  explanation  of  monopolies  is  that  a 
combination  can  secure  all  the  economies  that  come 
Economies  in  from  production  on  a  large  scale.  Some  of 
production.  ^ie  greatest  monopolies  claim  that  they  have 
cheapened  the  cost  of  producing  commodities.  This 
subject  has  been  discussed  elsewhere  (§  100 -§  103). 
Experience  proves  that  large-scale  production  does  lead 
to  more  economical  production ;  but  it  has  not  yet  proved 
that  a  complete  monopoly  can  secure  many  material 
advantages  in  production  over  independent  enterprises 
large  enough  to  secure  full  efficiency  of  plant.  Some  of 
the  great  combinations  have  effected  economies  in  pro- 
duction. l  Yet,  independent  establishments  compete 
with  the  largest  monopolies  so  effectively  that  they  are 
crushed  only  by  foul  means.  We  have  not  enough  data 
at  present  to  enable  a  final  decision  to  be  formed  on  this 
question.  Whenever  the  great  combinations  shall  be 
able  to  make  a  profit  from  selling  at  prices  so  low  as  to 
make  it  impossible  for  independent  producers  to  compete 
on  equal  terms,  then  all  will  have  to  admit  that  monopo- 

1  Monopolies  may  combine  their  patents,  so  that  every  process  i-s  per- 
formed with  the  most  approved  appliances.  Yet  large  independent  enter- 
prises  may  at  any  mojoeut^secure  new  inventions-.  ;  Monopolies  niayBuy  ( 
their  raw  materials  symcii'hjtt  cheaper,  since  they  can  order  very  large" 
quantities  at  a  time.  The  student  will  find  these  questions  discussed  in 
the  works  referred  to^at  the  eud_of  the  chapter. 


CAPITALISTIC  MONOPOLIES.  327 

lies  possess  greater  advantages  in  the  mere  work  of 
production.  Manifestly,  however,  the  possession  of  supe- 
rior facilities  cannot  be  proven  by  the  fact  that  monopo- 
lies crush  independent  producers  by  selling  at  a  loss  until 
the  smaller  competitors  are  ruined.  It  must  be  admitted 
that  the  day  of  production  on  a  small  scale  is  past.  But 
the  question  is  concerning  the  greater  economy  of  mo- 
nopolies over  independent  large-scale  production. 

§  216.  The  growth  of  the  greatest  capitalistic  mo- 
nopolies has  been  aided  by  alliances  with  natural 
monopolies,  especially  with  railroads.  The  Alliances  of 
Standard  Oil  Combination  has  always  had  ^naTurai 
the  aid  of  railroads  in  crushing  competitors,  monopolies. 
Independent  refiners  were  charged  higher  freight  rates 
at  first,  and  the  excess  over  the  normal  rates  was  paid 
to  the  Standard  Oil  Combination.  This  was  exposed, 
and  the  contracts  with  the  railroads  were  ostensibly  can- 
celed. But  a  continuous  line  of  evidence,  extending  to 
the  very  month  in  which  this  is  written,  shows  that  the 
oil  monopoly  has  always  received  assistance  from  the 
railroads.  So  with  the  dressed-meat  combination.  A 
Congressional  investigation  showed,  in  1888,  that  freight 
rates  west  of  Chicago  encouraged  shipments  of  cattle  to 
that  city.  After  reaching  Chicago,  the  trunk-line  asso- 
ciation refused  to  haul  cars  of  private  shippers  to  New 
York,  so  that  the  cattle  had  to  be  unloaded  at  the 
stock  yards  controlled  by  the  four  great  packing  houses. 
Then  the  meat  combination  received  a  mileage  allow- 
ance of  nearly  $200  per  annum  on  each  car  used  in 
shipping  their  products  to  the   East.     Finally,  some  of 


328  PRINCIPLES   OF  ECONOMICS. 

the  railroads  refused  to  carry  cattle  for  local  butchers 
who  would  not  sell  the  dressed  beef  of  the  great  com- 
bination. These  are  by  no  means  exceptional  instances, 
and  they  show  how  alliances  with  natural  monopolies 
have  served  to  build  up  combinations. 

§  217.    The    opponents    of    a   protective   tariff    have 

declared  that  trusts  in  the  United    States   have   been 

Relation  of      due  to  the  exclusion  of  foreign  competition 

thrprotictive  hy  our  tariff-     The  formation  of  a  monopoly 
tariff.  is  easier  when  the  possibility  of  foreign  com- 

petition is  excluded  ;  and  it  is  possible  to  show  that 
some  combinations  have  profited  in  this  way.  But  the 
underlying  causes  of  monopolies  reach  deeper  than  the 
tariff,  which  has  been  merely  one  circumstance  that  may 
have  favored  their  growth. 

§  218.     Much  of    the   opposition    to   monopolies  has 
been  due  to  their  unscrupulous  and  criminal  methods 

of  crushing  competitors,  and  securing  nrivi- 
EvU  methods  ,  n  % 

of  some  leges  from  the  government.     Some  of  them 

monopo  es.  jjave  conspired  with  railroads  to  prevent 
competitors  from  using  the  national  highways  on  equal 
terms.  Some  have  hired  agents  to  destroy  the  property 
of  their  rivals.  Some  have  corrupted  city  officials,  state 
legislatures,  and  courts  for  the  purpose  of  accomplish- 
ing their  ends  ;  and  their  sinister  influence  has  been  felt 
repeatedly  in  Congress.  Furthermore,  the  stocks  and 
bonds  issued  by  the  corporations  composing  some  mo- 
nopolies have  been  "listed "upon  the  stock  exchanges. 
In  many  such  cases,  the  managers  of  the  combinations 
have  indulged  in  the  very  worst  practices  known  to  the 


FINAL   CONSIDERATIONS.  329 

exchanges,  in  order  to  make  money  by  manipulation  of 
the  stock  market.  Managers  frequently  have  gambled 
in  their  stocks  to  the  extent  of  neglecting  the  real 
interest  of  their  companies,  and  have  caused  infinite 
demoralization  in  the  legitimate  work  of  the  exchanges. 
Many  honorable  men  have  been  connected  with  combina- 
tions, and  it  must  be  distinctly  stated  that  the  charges 
above  enumerated  cannot  be  brought  against  all  monopo- 
lists. But  the  evil  practices l  of  many  of  the  largest 
monopolies  have  been  so  flagrant  that  honest  men  find  it 
ditlicult  to  form  deliberate  and  impartial  judgments  con- 
cerning the  economic  aspects  of  combinations.  But  the 
student  of  economics  must  put  aside  all  prejudices,  how- 
ever natural  and  justifiable ;  and  must  consider,  coolly 
and  impartially,  the  purely  economic  advantages  or 
weaknesses  of  monopolies. 

VI.     Final  Considerations  Concerning  Monopolies. 
§  219.    While  it  is  impossible  to  forecast  the  future 
with  accuracy,  it  is  possible  to  emphasize  certain  facts 
concerning  our  experience  with   capitalistic  Ca  itali  ti 
monopolies  up  to  the  present  moment.     It  monopolies 
is  certain  that  most  attempts  in  this  direc-  had  absolute 
tion  have  failed.     The  unsuccessful  monop-  contro1- 
olistic    enterprises   have    outnumbered    the    successful, 
while  the  latter  have  constantly  been   confronted  with 

1  Readers  will  find  in  the  Congressional  ami  state  investigations  of 
trusts,  cited  at  the  end  of  this  chapter,  an  enormous  amount  of  evidence 
relating  to  these  abuses.  Every  good  citizen  should  read  II.  I).  Lloyd, 
"  Wealth  against  Commonwealth,"  for  an  account,  supported  by  detailed 
evidence,  of  the  criminal  methods  of  some  monopolies. 


330  PRINCIPLES   OF  ECONOMICS. 

new  independent  enterprises.  Only  in  a  minority  of 
instances  have  combinations  acquired  an  effective  con- 
trol of  prices,  while  they  have  never  been  able  to  drive 
all  independents  out  of  business. 

This  has  been  due  largely   to  the   pressure  of   new 

capital  seeking  for  investment.     This  is  a  mighty  force 

in  the  United  States.     A  monopoly  must  not 

The  pressure 

of  capital  for   only  control  a  majority  of  the  supply  at  the 
investment.     ^mQ  y.  jg  formeci?  kut  must  deal  with  dozens 

of  future  competitors.  Whenever  prices  have  been  main- 
tained by  a  combination  at  an  unusually  profitable  level, 
new  capital  has  invariably  flowed  into  that  business. 
Many  of  these  new  enterprises  are  established  with  the 
purpose  of  forcing  the  monopoly  to  buy  them  up  at  good 
prices.  Others  find  it  profitable  to  sell  their  products 
at  the  high  prices  established  by  the  monopoly,  but  are 
likely  to  join  the  combination  in  the  end.  Many  of  the 
attempted  monopolies  have  aimed  solely  to  limit  the 
supply  and  to  raise  prices.  Such  have  fallen  under 
attacks  from  new  competitors  attracted  by  excessive 
prices. 

§  220.  The  successful  combinations  have  been  those 
that  endeavor  to  effect  savings  in  producing  and  market- 
Monopolies  m£  tne'r  products,  and  to  sell  at  prices  that 
and  prices.  0ffcr  iess  inducement  for  attacks  by  outside 
capital.  The  Standard  Oil  and  the  Sugar  Refining 
Combinations  have  reduced  the  prices  to  consumers,  and 
exhibit  statistics  to  prove  this.  The  student  needs  to 
remember,  however,  that  the  prices  of  all  commodities 
have  fallen  dining  the  last  twenty  years,  and  that  the 


FINAL    CONSIDERATIONS.  331 

charges  for  refining  oil  and  sugar  have  decreased  very 
slightly  since  the  formation  of  these  monopolies.  On 
the  whole,  combinations  have  prevented  their  products 
from  falling  in  price  as  fast  as  the  great  mass  of  com- 
modities. They  sell  at  monopoly  prices,  that  is,  prices 
that  yield  the  largest  net  returns,  except  when  forced  to 
lower  prices  in  order  to  meet  or  prevent  competition. 

§  221.    Some  of  the  opponents  of  monopolies  declare 
that  they  limit  production  and  raise  prices  various  views 
through   the   artificial   scarcity  which  they  ^SjSSSc 
create.     These  opponents  consider  monopo-  monopoues. 
lies  to   be   artificial  obstructions  to  competition,  which 
the  law  should  sweep  away. 

Other  writers  hold  that  capitalistic  monopolies  arise 

mainly  by  alliances  with  natural  monopolies.    If  natural 

monopolies  should  be  controlled  by  govern- 

r  J . fo  Capitalistic 

ment  so  that  the  rest  of  the  field  of  industry  and  natural 
should  be  open  to  all  on  equal  terms,  these  monopo 
writers    believe    that    other   monopolies   could   not  be 
maintained. 

Other  economists  take  a  more  favorable  view.  They 
admit  the  abuses  that  arise  from  alliances  of  capitalistic 
and  natural  monopolies,  but  hold  that  the  a  more  favor- 
explanation  of  the  growth  of  combinations  is  ablevlew' 
that  they  avoid  the  wastes  of  competition  and  secure 
economies  in  production.  These  savings  represent  a 
gain  to  society  ;  and  a  wise  policy  will  preserve  this 
gain,  while  minimizing  the  evils  of  monopolies. 

Finally,  socialists  believe  that  monopolies  are  superior 
forms  of  organization  that  are  destined  to  prevail  in  all 


332  PRINCIPLES   OF  ECONOMICS. 

industries.     Competition  is  no  longer  possible.     When 

The  view  of     a^  industries  fall  into  the  control  of  giant 

socialists.        monopolies,    the    government    will    assume 

the  ownership  of  these  combinations.     This  will  mean 

complete  socialism. 

These  conflicting  views  present  the  most  difficult  prac- 
tical problem  that  confronts  economists.  There  can  be 
Difficulty  of  no  doubt  of  the  impossibility  of  competition 
me  problem.  m  natural  monopolies.  Therefore,  the  ques- 
tion of  the  future  of  capitalistic  monopolies  raises  the 
entire  question  whether  competition  will  he  possible  in 
any  part  of  the  business  world.  This  problem  is  be- 
ing pushed  to  the  front  by  every  new  combination  of 
capital. 

§  222.    No    one   denies   that  a  monopoly   places  im- 
mense power  in  the  hands  of  the  monopolist.     Capital- 
istic monopolies  have  proved    objectionable 
that  monopoly  because  they  lead  to  gross  abuses,  and  the 

power  win      public  has  as  vet  no  guarantee  that  monopo- 
not  be  abused.   *  "  *■ 

lists  will  not  abuse  their  power  in  the  future. 

For  this  reason  many  people  favor  the  immediate  aboli- 
tion of  all  such  combinations  by  law. 

Other  writers  hold  that  combinations  offer  the  most 

economical  organization   of  production,  and  that  it  is 

.     ,       ,     unwise  and  useless  to  attempt  to  suppress 

Legal  regula-  *  ■  ■ 

tionofmo-      them.     Society  has,  however,  the  right  to 
regulate  monopolies  and  to  prevent  irrespon- 
sible  abuses   of   their  power.      Legal  regulations  may 
oblige  all  combinations  to  furnish  a  satisfactory  supply 
of  commodities  at  reasonable  prices. 


FINAL   CONSIDERATIONS.  333 

Again,  it  is  argued  that  no  combination  can  suppress 
competition  permanently,  and  prevent  it  from  assuring 
to  society  good    service  at  fair    prices.     A 

J     6  '  The  persist- 

COmpletc   monopoly   would   not   destroy   the   enceofcom- 

potential  competition  of  new  capital  at  any  ** 
time  when  high  prices  offered  a  prospect  of  large  profits. 
In  the  pressure  of  capital  seeking  investment  we  have  a 
force  that  will  guarantee  society  from  abuses.  This 
argument  gains  force  when  one  reflects  that  monopolists 
constantly  seek  opportunities  to  invest  their  savings.  If 
we  conceive  of  all  industry  as  under  the  sway  of  fifty 
gigantic  monopolies,  then  the  earnings  of  each  monopoly 
would  menace  every  other  with  competition  the  moment 
that  prices  should  be  raised  unduly.  Monopoly  earnings 
must  be  invested  in  some  enterprise  that  supplies  social 
wants  ;  and  the  pressure  of  capital  for  investment  might 
prevent  monopolistic  abuses.  At  the  present,  monopo- 
lists are  entering  each  other's  fields  of  industry.  One 
monopolist  is  investing  in  match  factories,  and  attacking 
the  match  monopoly.  The  leader  of  the  oil  combination 
is  entering  the  iron  and  steel  industries.  It  is  urged 
that  this  pressure  of  one  monopolist  upon  another  will 
surely  increase  from  year  to  year. 

§  223.    The  following  conclusions,  in  the  judgment  of 
the  author,  are  all  that   can  be   safely  affirmed  from 
our  present   experience  of  capitalistic   mo-  Concluslons  as 
nopolies  :  —  t0  the  erovth 

and  nature  of 

1.     Capitalistic    monopolies    are    usually  capitalistic 

t  .  ,  ,  j  •  monopolies. 

complex   m  character  and   possess  various 

elements    that   produce   monopoly.     The    Standard   Oil 


334  PRINCIPLES   OF  ECONOMICS. 

Combination  has  certain  elements  of  natural  monopoly. 
Patent  rights  and  other  elements  of  legal  monopoly  are 
to  be  found  in  the  majority  of  modern  combinations. 
Then,  alliances  with  railroads  and  other  natural  monop- 
olies have  assisted  the  growth  of  some  of  the  largest 
and  most  powerful  capitalistic  monopolies  in  the  United 
States. 

2.  Looking  at  the  wastes  of  modern  competition,  it 
seems  clear  that  combinations  save  many  expenses, 
and  more  easily  contract  production  whenever  prices 
fall.  But  this  does  not  justify  the  inference  that  capi- 
talistic monopolies  are  inevitable.  It  merely  warrants 
the  conclusion  that  combination  offers  one  method  of 
avoiding  the  wastes  of  competition.  There  may  be  other 
methods  of  ending  these  wastes.  A  higher  standard  of 
commercial  morality,  a  more  moderate  business  policy, 
and  a  development  of  trade  statistics  that  shall  make 
possible  an  accurate  forecast  of  the  market  would 
change  the  nature  of  competition  considerably,  and 
would  terminate  many  of  its  worst  features  at  the 
present  moment.  Monopolies  are  undoubtedly  one  rem- 
edy for  the  present  wastes  of  competition,  but  it  is  alto- 
gether premature  to  conclude  that  they  are  going  to 
prove  the  only  remedy  available  in  all  future  times. 
But  it  is  not  likely  that  business  conditions  and  methods 
will  undergo  any  marked  change  in  the  immediate  fu- 
ture. For  this  reason  we  are  liable,  for  some  time  to 
come,  to  see  capitalistic  combinations  resorted  to  as  a 
means  of  avoiding  the  evils  of  disordered  competition. 

3.  Monopolies  may  realize  some  economies  in  produc- 


FINAL   CONSIDERATIONS.  335 

tion,  but  they  also  entail  heavy  expenses  for  supervi- 
sion of  their  immense  interests,  while  they  are  likely  to 
incur  the  wastes  to  which  great  corporations  are  subject 
(§  91).  The  student  must  remember  that  we  are  com- 
paring monopolies  with  large-scale  independent  enter- 
prises, not  with  small-scale  production.  It  is  decidedly 
not  proven  that  the  economies  in  production  realized  by 
monopolies  are  so  great  as,  of  themselves,  to  assure  to 
combinations  future  control  of  all  markets.1 

1  Since  the  beginning  of  1898  the  formation  of  industrial  combinations 
has  been  phenomenally  rapid.  On  April  8,  1899,  a  financial  paper  com- 
puted the  capitalization  of  new  combinations  formed  since  the  first  of  the 
preceding  January  at  $1,526,325,000.  A  recent  writer  states  that  in  March, 
1899,  there  were  in  this  country  353  trusts  capitalized  at  $5,832,000,000. 
These  include  nearly  all  important  branches  of  manufacturing  industry. 
These  combinations  are  greatly  over-capitalized,  and  have  been  created 
largely  for  the  purpose  of  disposing  of  their  securities  at  the  high  prices  that 
have  recently  prevailed  in  the  stock,  markets.  Usually  the  issues  of  bonds 
or  of  preferred  stock  have  represented  all  the  capital  actually  invested,  and 
sometimes  more,  since  the  value  of  the  plants  has  been  estimated  at  a  very 
liberal  figure.  The  common  stock  represents  nothing  but  the  "  good  will  " 
of  the  businesses,  or  what  is  generally  known  as  "water";  and  in  many 
of  these  combinations  its  holders  will  never  be  likely  to  receive  any  divi- 
dends. In  the  combinations  formed  between  January  1  and  April  8,  1899, 
the  bonds  and  preferred  stock  amounted  to  $603,850,000 ;  while  the  issues 
of  common  stock  reached  the  figure  of  $922,475,000.  See  "  Commercial 
and  Financial  Chronicle,"  Jan.  7,  1899,  March  4,  1899,  and  April  8,  1899; 
"  Bradst  reefs,"  Feb.  11,  and  18,  1899;  "Commercial  Year  Book  of  New 
York  Journal  of  Commerce/'  1898. 


336  PRINCIPLES  OF  ECONOMICS. 


LITERATURE   ON"  CHAPTER  XI. 

General  References:  Andrews,  Institutes  of  Economics,  112- 
113;  Ely,  Economics,  210-217,  295-307;  Gunton,  Social  Eco- 
nomics, 397-114 ;  Hadley,  Economics,  150-179 ;  Marshall, 
Principles  of  Economics,  532-547  ;  Newcomb,  Political  Economy, 
230-240  ;  Sidgwick,  Principles  of  Political  Economy,  348-365. 

Special  References  :  Adams,  The  Relation  of  the  State  to  In- 
dustrial Action,  47-61;  Clark,  Theory  of  Economic  Progress; 
Clark  and  Giddings,  The  Modern  Distributive  Process,  1-34; 
Dodd,  Combinations,  Their  Uses  and  Abuses  ;  Cook,  The  Cor- 
poration Problem  ;  Ely,  Problems  of  To-day,  107-146 ;  Farrer, 
The  State  in  Its  Relation  to  Trade,  57-119;  Foote,  Law  of  Com- 
panies Operating  under  Municipal  Franchises;  Hadley,  Railroad 
Transportation,  63-145;  Hobson,  Evolution  of  Modern  Capital- 
isms, 88-166  ;  Jeans,  Trusts,  Pools,  and  Corners  ;  Johnson's 
Universal  Cyclopaedia,  "Monopolies;"  Lalor's  Cyclopsedia  of 
Political  Science,  "  Monopolies ;  "  Lloyd,  Wealth  against  Com- 
monwealth ;  Spelling,  Treatise  on  Trusts  and  Monopolies  ;  Aton 
Halle,  Trusts  and  Industrial  Combinations;  Bemis,  Municipal 
Monopolies;  Ely,  Monopolies  and  Trusts;  Gunton,  Trusts  and 
the  Public. 

References  to  Official  Investigations  of  Monopolies  :  Report 
in  relation  to  the  Sugar  Trust  and  the  Standard  Oil  Trust,  by 
Committee  on  Manufactures,  H.  of  11.  ;  Report  of  New  York  Sen- 
ate Committee  on  the  Investigation  Relative  to  Trusts;  Testimony 
Taken  by  Select  Committee  of  the  U.  S.  Senate  on  the  Transpor- 
tation and  Sale  of  Meat  Products. 

References  to  Economic  Journals:  Andrews,  "Trusts  accord- 
ing to  Official  Investigations,"  Quarterly  Journal  Economics,  III. 
118-152;  "The  Lute  Copper  Syndicate,"  Q.  J.  E.,  ITT.  508-518; 
DwiGHT,  "The  Legality  of  Trusts,"  Political  Science  Quarterly, 
III.  592-632;  Gunton,  "Economic  and  Social  Aspects  of  Trusts," 
P.  S.  Q.,  III.  592-632;  Jenks,  "Development  of  the  Whiskey 
Trust,"  P.  S.  Q.,  IV.  296-319;  "  Capitalistic  Monopolies,"  P.  S 
Q.,  IX.  486-509. 


FOREIGN  TRADE  OF  THE  UNITED  STATES.       337 


CHAPTER   XII. 


INTERNATIONAL   TRADE. 

I.    The  Foreign  Trade  of  the  United  States. 

§  224.   The    foreign    commerce   of    this    country    is 

smaller  than  the  domestic,  although  it  usually  receives 

far  greater  attention.      Yet  our  commerce  Magnitude  of 

with  foreign  countries  is  surpassed  only  by   theforeis11 

1  J      J     commerce  of 

the  foreign  trade  of  England,  France,  and  the  united 
Germany.     The   following  table   shows  the 
exports  and  imports  of  merchandise  of  the  United  States 
for  fiscal  years  ending  June  30  :  — 


Year. 

Exports. 

Imports. 

Total. 

1894 
1895 
1896 
1897 
1898 
1899 

$892,140,000 
807,538,000 
882,606,000 
1,050,993,000 
1,231,482,000 
1,227,205,000 

$654,994,000 
731,969,000 

779,724,000 
764,730,000 
616,049,000 
697,116,000 

$1,547,135,000 
1,539,508,000 
1,662,331,000 
1,815,723,000 
1,847,531,000 
1,924,321,000 

§  225.  The  principal  exports  from  the  United  States 
have  always  been  agricultural  products.  In  1899 
these    formed    sixty-live    per    cent    of    the  _        •  , 

J  r  Character  of 

total,  while  manufactured  goods  made   up  the  export 

•    i  .  ^       mi  r  trade, 

twenty-eight  per  cent.     Ine  exports  ot  man- 
ufactured products  show  a  gradual  increase  from  yeai 


338 


PRINCIPLES  OF  ECONOMICS. 


to  year.     The  most  important  articles  exported  in  1899 
were  as  follows  :  — 


Commodity. 

Value. 

Commodity. 

Value. 

Breadstuffs  .     .     . 
Haw  cotton  .     .     . 
Meat    and    Dairy  ) 

Produce     .     .     .  ( 
Iron  and  Steel  and  / 

Manufactures    .  \ 
Mineral  Oils      .     . 
Wood  and  Manu-  ) 

factures     ...  J 
Live  Animals    .     . 

$273,999,000 
209,564,000 

175,508,000 

93,715,000 
51,070,000 
41,679,000 
37,880,000 

Copper  and  Manu-  ) 

factures  .  .  .  J 
Tobacco  and  Man-  1 

ufactures  .  .  .  J 
Manufactures      of  j 

Cotton  .  .  .  .  j 
Leather  and  Man-  ) 

ufactures  .  .  .  ) 
Oil-Cake  and  Meal 

$35,983,000 

30,646,000 

23,567,000 

23,466,000 
14,531,000 

§  226.    Of  the  commodities  imported  into  the  United 
character  of    States  in  1899  fifty-one  per  cent  came  from 

our  import  .       .      ,   . 

trade.  Europe.     I he  principal  imports  were  :  — 


Commodity. 

Value. 

Commodity. 

Value. 

Coffee      .     .     .     .     o 
Vegetable  Fibres  and  | 

Manufactures    .     .  f 
Chemicals,      Drugs,  | 

and  Medicines  .     .  \ 
Hides  and  Skins  .     . 
Raw  Silk     .... 
Cotton  Manufactures 

$94,964,000 
55,274,000 

45,423,000 

42,668,000 

41,988,000 
32,479,000 
32,053,000 

India  Rubber  and  ^ 
Gutta  Percha   .  [ 

Manufactures  of  I 
Silk     .     .     .     .  ) 

Fruits  and  Nuts  . 

Jewelry,  etc.    .     . 

Wood  and  Manu-  I 
factures  .     .    .  J 

$31,876,000 

25,105,000 

18,317,000 
17,649,000 

14,499,000 

Our  imports  consist  mainly  of  food  products  and 
raw  materials  which  we  are  unable  to  raise  at  all,  or 
unable  to  raise  in  sufficient  quantity.  The  imports 
of  wholly  or  partially  manufactured  goods  amount 
to  less  than  $200,000,000.  This  is  only  a  small  frac- 
tion of  the  product  of  domestic  manufactures. 


INTERNATIONAL    COMMERCE.  339 

II.  The  Nature  of  International  Commerce. 
§  227.    Merchants   sell  commodities  in  foreign  coun- 
tries, or  import  goods  from  abroad,  whenever  differences 
between  domestic  and  foreign  prices  make  international 
it  profitable  to  do  so.     The  exporter  or  the  trade  seems  to 

1  *  be  an  exchange 

importer   sells   goods   for   money,    or   buys  of  commodities 
foreign    merchandise    with    money.     From 
this  point  of  view,  international  trade  consists  in  the 
exchange  of  commodities   for  money. 

§  228.  The  shipment  of  money  from  one  country  to 
another  entails  considerable  expense,  so  that  an  elabo- 
rate mechanism  of  credit  has  been  developed  The  mechanism 

i  •         i  of  interna- 

to  enable  international  trade  to  be  carried  tionai  pay- 
on  with  as  little  money  as  possible.  Drafts  ments- 
and  bills  of  exchange  serve  to  pay  most  international 
debts,  so  that  money  is  used  merely  to  pay  balances 
(§  1G4).  When  the  exports  of  a  country  exceed  the 
imports,  then  foreign  debtors  cannot  secure  enough 
bills  of  exchange  to  pay  for  their  purchases,  and  money 
may  be  sent  to  settle  the  balance  of  indebtedness.  An 
excess  of  exports  over  imports  is  said  to  create  a  "  favor- 
able balance  of  trade."  When  imports  exceed  exports, 
money  may  be  sent  abroad  to  pay  for  the  excess,  and 
the  balance  of  trade  is  said  to  be  "  unfavorable." 

The  exports  from  a  country  pay  for  the  great  bulk  of 
the  commodities  imported.    The  statistics  of  Exports  pay 
the  foreign  commerce  of  the  United  States  for  Unports' 
show  how  little  money  is  used  in  foreign  trade :  l  — 

1  Since  1890,  disturbances  in  our  currency  have  caused  exports  and  im- 
ports of  gold  not  strictly  due  to  the  condition  of  international  commerce. 


340 


PRINCIPLES   OF  ECONOMICS. 


Tear. 

Total  Exports  and  Imports 
of  Commodities. 

Total  Exports  and  Imports 
of  Gold  and  Silver. 

1886 
1887 
1888 
1889 
1890 

§1,314,960,000 
1,408,502,000 
1,419,911,000 
1,487,533,000 
1,647,139,000 

$111,057,000 

96,168,000 

105,752,000 

125,604,000 

86,124,000 

§  229.    The  foreign  exchanges  of  any  country  include 
many  other  international  transactions  besides  the  pur- 
ine foreign      chase  or  sale  of  merchandise.     The  follow- 
excnanges.      }Ug  transactions   give   rise  to   international 
indebtedness  : 1  — 

1.  Investment  of  capital  in  foreign  countries.  This 
gives  rise  at  first  to  a  debt  owed  by  the  country  whose 
citizens  make  the  investment.  Then  it  causes  an  an- 
nual debt  owed  to  foreign  capitalists  by  citizens  of 
the  country  where  the  capital  is  invested.  At  least 
$2,000,000,000  of  foreign  capital  is  invested  in  the 
United  States,  and  this  amount  is  increased  in  pros- 
perous years.  Thus  the  United  States  owes  about 
$90,000,000  annually  for  interest  on  foreign  capital. 

2.  English  ships  do  a  large  part  of  the  ocean  carry- 
ing trade  of  the  world,  and  receive  payments  for  freight- 
age. Of  the  foreign  trade  of  the  United  States  only 
about  twelve  per  cent  has  been  carried  in  American 
vessels  in  recent  years,  so  that  we  have  owed  a  balance 
of  freight  charges   to   foreigners.     The  inward  freight 


1  For  a  full  account  of  such  transactions,  see  Goschen,  "The  Foreign 
Exchanges."  Space  permits  merely  a  mention  of  the  most  important 
here. 


INTERNATIONAL    COMMERCE,  341 

charges  paid  to  foreign  ship   owners   may  amount   to 
about  #75.000.000  annually. 

3.  Citizens  who  travel  in  foreign  countries  incur  in- 
debtedness there.  Americans  spend  about  -1-17,000,000 
in  foreign  travel  each  year.  This  figure  greatly  exceeds 
the  expenditures  made  by  foreign  travelers  in  this  coun- 
try ;  so  that  we  owe  abroad  many  million  dollars  annu- 
ally for  the  excess. 

4.  London  serves  as  a  world's  clearing  house  for  the 
settlement  of  international  debts.  The  charges  made 
for  such  services  create  debts  owed  by  all  nations  to 
London  bankers. 

As  a  result  of  all  such  international  obligations,  Eng- 
land is   the   creditor   of   many  nations   each   year   for 
freight  charges  earned  by  English  ships,  for  Comparative 
interest  on  several  billion  dollars  of  capital   positions  of 

,  .  .  .    .  ,    r  England  and 

invested  in  various  countries,  and  tor  com-  the  united 
missions,  etc.,  of  London  bankers.  As  a  states- 
result,  she  is  able  to  import  merchandise  that  vastly 
exceeds  her  exports,  and  does  not  have  to  pay  for  the 
"  unfavorable  balance  of  trade "  by  shipping  gold  to 
other  countries.  The  United  States,  however,  owes 
about  $150,000,000  annually  to  foreign  creditors  for  the 
various  items  enumerated.  Consequently  our  exports 
of  merchandise  may  exceed  our  imports  largely  without 
making  it  necessary  for  foreign  buyers  to  ship  gold  to 
this  country.  In  prosperous  years,  however,  it  is  prob- 
able that  foreigners  constantly  invest  capital  here  ;  so 
that  the  volume  of  our  indebtedness  is  decreased. 

§  230.  In  a  majority  of  cases  international  payments 


342  PRINCIPLES  OF  ECONOMICS. 

for    all    forms    of   indebtedness   are    made    indirectly 
indirect         through  London.     Tea  imported  from  China, 

settlement  of  •  ii_       ■  j.    -i     r  m  •    ±        i-\ 

international   or   silks   imported   from   h  ranee,  into    the 
debts.         •  Tjnited  States  may  be  paid  for  by  bills  of 
exchange  drawn  by  American  creditors  against  exports 
of  wheat  or  cotton  sold  to  English  merchants. 

§  231.  Money  is  shipped  from  one  country  to  another 
when  needed  to  settle   a   balance   of  indebtedness  for 
int  ai   miPor^s  °f  merchandise,  for  freight  charges, 

movements  for  interest  on  foreign  investments,  for  trav- 
elers' expenses,  etc.  Many  errors  are  made 
by  comparing  the  exports  and  imports  of  money  with 
exports  and  imports  of  merchandise.  Money  is  needed 
merely  to  settle  net  balances  of  indebtedness  of  all  sorts. 
The  United  States  has  had  a  considerable  surplus  of 
exports  of  merchandise  (a  "  favorable  balance  of 
trade  ")  every  year  since  1876  with  only  three  excep- 
tions. Yet  our  imports  of  gold  and  silver  have 
exceeded  exports  in  only  five  years  during  this  period. 
The  explanation  is  that  our  other  foreign  debts  plus 
the  debt  owed  for  imports,  exceeded  usually  our  exports 
of  merchandise  and  the  other  debts  owed  us  by  for- 
eigners. On  the  other  hand,  Great  Britain  has  each 
year  an  enormous  excess  of  imports  over  exports  of 
merchandise,  but  this  "  unfavorable  balance  of  trade  " 
is  not  paid  by  exports  of  money.  It  comes  as  payment 
for  other  debts  owed  by  citizens  of  foreign  countries. 

Eliminating  all  disturbances  originating  in  the  money 
supply,  and  supposing  that  a  country  has  a  sound  cur- 
rency, then  imports  or  exports  of  money  will  be  regu- 


INTERNATIONAL   COMMERCE.  343 

lated  automatically.      Suppose  money  to  flow  into  the 
United  States  in   settlement  of   a   net   in-    .  .      .. 

Automatic 

debtedness  of  foreigners.  Continued  im-  limits  to 
ports  of  money  will  raise  prices  here,  and  imports  of 
tend  to  lower  them  in  the  countries  whence  money- 
the  money  comes.  The  rise  of  prices  will  make  this  a 
good  market  to  sell  in  and  a  bad  market  to  buy  in. 
Thus  imports  will  increase  and  exports  decrease,  until 
our  increasing  imports  create  a  debt  to  foreigners  that 
will  balance  the  debts  that  caused  shipments  of  money. 
When  imports  of  merchandise  increase  to  this  extent, 
the  inflow  of  money  will  cease.  Conversely,  if  money 
continually  leaves  the  country,  prices  tend  to  fall ; 
exports  increase  and  imposts  decrease.  A  growing 
excess  of  exports  of  merchandise  will  finally  turn  the 
balance  of  indebtedness  the  other  way,  and  check 
exports  of  money.  A  nation  that  produces  as  much 
gold  and  silver  as  the  United  States  may  export  some 
gold  and  silver  continually,  without  lowering  prices 
materially. 

The  international  movements  of  money  are  affected 
by  the  action  of  international  banking  houses.  When- 
ever the  rate  of  interest  on  call  loans  or 

The  action 
short-time  paper  is  very  low  in  London,  for     of  banking: 

instance,  these  banking  houses  are  likely  to 

ship  part  of  their  reserve  of  money  to  New   York,  or 

Berlin,  or  Paris,  in  order  to  take  advantage  of  higher 

rates  of  interest  in  those  cities. 

§  232.    It  was  thought  formerly  that   foreign   trade 

was  beneficial  when  it  led  to  an  excess  of  exports  over 


344  PRINCIPLES   OF  ECONOMICS. 

imports,  and  hence  to  imports  of  the  precious  metals. 

This   idea  has  been   abandoned  by  economists  since  it 

has  been  seen  that  a  continued   importa- 

The  advantages 

of  interna-  tion  of  money  merely  tends  to  raise  prices 
and  to  check  itself.  A  country  cannot  sell 
to  other  countries  unless  it  also  buys.  This  year  it 
may  be  possible  to  check  imports  and  to  stimulate 
exports.  But  next  year  or  the  following  year  continued 
importations  of  gold  will  raise  prices,  make  it  more 
difficult  to  sell  in  foreign  countries,  and  make  it  easier 
for  foreigners  to  sell  commodities  here.  The  real 
advantages  of  foreign  commerce  are  :  — 

1.  It  enables  a  country  to  procure  commodities  that 
cannot  be  produced  at  home. 

2.  It  enables  a  country  to  produce  those  products  for 
which  it  has  the  greatest  advantages,  and  to  exchange 
them  for  products  which  cannot  be  produced  as  cheaply. 

III.    International  Values 

§  233.    International  trade  is  profoundly  influenced  by 

the  fact  that  capital  and  labor  do  not  move  from  one 

country  to   another  as    readily  as  between 

Imperfect  mo- 
bility of  labor  different    localities    in    the    same    country. 

an  capi  .  Distance,  language,  religion,  political  insti- 
tutions, and  customs  all  tend  to  hinder  international 
movements  of  labor  and  capital.  Undoubtedly  some 
of  these  causes  impede  the  movement  of  labor  and 
capital  within  such  a  vast  country  as  the  United  States. 
In  so  far  as  this  is  true,  trade  between  the  Atlantic  and 
Pacific  coasts,  for  instance,  resembles  international  trade 


INTERNATIONAL    VALUES.  345 

in  this  particular.  Modern  conditions  favor  the  move- 
ment of  labor  and  capital  between  different  countries, 
yet  this  immobility  still  exists. 

Within  any  area  where  labor  and  capital  are  practi- 
cally free  to  move  where  they  desire,  all  commodities 
will  be  produced  in  those  places  where  the  Result  of  this 
absolute  advantages  for  producing  them  are  "nmot)lllt>' of 

°  l  °  labor  and 

greatest.  The  localities  that  offer  the  great-  capital, 
est  advantages  will  become  the  exclusive  seats  of  pro- 
duction of  each  commodity.  These  advantages  include 
all  elements  that  tend  to  make  the  social  cost  of  pro- 
duction low,  and  include  the  important  element  of 
accessibility  to  the  market.  The  products  of  such  an 
area  will  tend  to  have  a  value  proportioned  to  the  mar- 
ginal expense  of  producing  them.  On  the  other  hand, 
between  two  countries,  all  labor  and  capital  will  not  flow 
to  the  places  in  either  country  where  the  absolute  advan- 
tages for  production  are  greatest.  Each  country  will 
invest  its  labor  and  capital  so  as  to  make  the  best  of  the 
advantages  which  it  has.  Only  the  surplus  labor  and 
capital  of  older  nations  seek  investment  in  other  coun- 
tries where  the  natural  opportunities  for  investment  are 
not  so  fully  utilized  and  developed.  It  follows  that  a 
bushel  of  wheat  may  be  produced  in  one  country  with 
twice  the  expenditure  of  labor  and  capital  required  to 
produce  a  yard  of  cotton  cloth  ;  while,  in  a  second  coun- 
try, the  two  commodities  may  be  produced  at  exactly 
the  same  social  cost.  This  would  be  impossible  if 
labor  and  capital  moved  freely  from  one  country  to 
another. 


310 


PRINCIPLES   OF  ECONOMICS. 


§  234.    Money  tends  to  move  to  countries  where  its 

general  purchasing  power  is  greatest,  and  so  to  reduce 

international     the  Seneral  purchasing  power  of  an  ounce 

movements  of    0f   gold   to   the   same   level  in   all   places 

money  tend 

to  equalize        (§§  173-176).     But  this  does  not  mean  that 

general  prices.    the   pQwer  of   money  tQ   buy  wheat   Qr  ^^ 

or  steel  is  the  same  in  all  countries.  Within  each  coun- 
try the  prices  of  individual  commodities  will  be  propor- 
tional to  the  marginal  expense  of  producing  them.  This 
may  give  different  relative  prices  for  individual  com- 
modities in  every  country. 

§  235.   The  manner  in  which  relative  prices  vary  in 

Differences  of    different  countries  may  be  illustrated  by  the 

relative  prices.  f0nowing  table  of  assumed  prices  for  various 

commodities   in    two   countries,   say    England   and   the 

United  States :  — 


Commodities. 

Prices  in 
England. 

Prices  in 
United  States. 

One  ton  steel  rails   .     . 
One  pound  wool .     .     . 
One  yard  carpet .     .     . 
One  yard  cotton  cloth 
One  bushel  wheat   .     . 
One  bushel  corn       .     . 
One  pound  leather  .     . 
One  pound  pork       .     . 

$14.00 
.15 
1.20 
.12 
.90 
.70 
.20 
.15 

$20.00 
.20 
2.00 
.15 
.60 
.50 
.15 
.07 

We  assume  the  first  four  commodities  to  have  a 
smaller  money  cost  in  England,  and  the  last  four  to 
be  cheaper  in  the  United  States.  But  the  power  of  a 
dollar  to  command  the  entjre  group  of  commodities  in 
the  quantity  usually  consumed,  might  be  about  the  same 


INTERNATIONAL    VALUES.  347 

in  both  countries.  Finally,  this  tabic  of  prices  would 
tell  us  nothing  concerning  the  absolute  social  costs  of 
producing  any  one  of  these  commodities  in  the  two 
countries.  Less  units  of  labor  and  capital  might  be 
required  to  produce  a  ton  of  steel  rails  in  the  United 
States  than  in  England.  But  if  the  money  cost  of 
labor  and  capital  is  much  less  in  England,  the  money 
price  of  steel  rails  might  be  less  in  that  country.  Labor 
and  capital  do  not  now  from  one  to  the  other  freely 
enough  to  insure  to  each  unit  of  the  two  factors  of  pro- 
duction the  same  money  returns  in  both  countries. 

§  236.  Now,  an  American  exporter  of  wheat  will  send 
wheat  to  England  whenever  the  difference  in  the  prices 
of   wheat   is   sufficient   to   pay  the   cost   of  T  t 

1    J  International 

transportation   and    leave    a   profit   on   the  trade  based 
transaction.     Similarly,  American  importers  encesinreia- 
will    examine   the    English    prices    of   steel  tivePnces- 
rails,  carpets,  and  cotton  cloth ;  and  will  import  them 
if  they  can  pay  transportation  charges  and  yet  make  a 
profit   by  selling   at  American    prices.     Now,  it  might 
seem  that,  under  the  circumstances  assumed,  England 
would  supply  the  United  States  with  all  the  rails,  wool, 
carpets,  and  cotton  cloth  consumed  here ;  and  that  the 
United  States  would  furnish  England  with  all  her  supply 
of  wheat,  corn,  leather,  and  pork.     But  this  would  not 
be  the  case. 

Suppose  England  to  begin  to  export  to  the  United 
States  the  four  commodities  of  which  the  English  prices 
are  lower,  and  the  United  States  to  export  to  England 
the  four   commodities    of  which  the   American   prices 


us 


PRINCIPLES  OF  ECONOMICS. 


are   lower.      Such    a    trade    could    continue    until    one 

country   had  an  excess  of   exports  and  the  other  had 

Actual  course    an  excess  of  imports.     Exports  and  imports 

of  trade  be-       WOuld  not  balance  each  other  permanently, 
tween  the  r  J 

two  countries.  Suppose  the  United  States  sends  to  England 
money  to  pay  for  an  excess  of  imports.  As  this  expor- 
tation of  money  continues,  prices  begin  to  rise  in  Eng- 
land and  to  fall  in  the  United  States.  Suppose  the 
change  of  prices  to  be  twenty  per  cent.  Then  we  should 
have  an  altered  scale  of  prices  as  follows : — 


Commodities. 

English  prices. 

American  prices. 

Steel  rails  .     . 

$16.80 

$16.00 

Wool      -    .    . 

.18 

.16 

Carpets  .     .     . 

1.44 

1.60 

Cotton  cloth    . 

.144 

.12 

Wheat   .     .     . 

1.08 

.48 

Corn  .... 

.84 

.40 

Leather      .     . 

.24 

.12 

Pork      .     .     . 

.18 

.056 

Evidently  the  changed  prices  have  made  it  impossible 
for  English  merchants  to  sell  anything  but  carpets  in 
the  United  States ;  while  American  merchants  can 
export  increased  quantities  of  wheat,  corn,  leather,  and 
pork,  and  might  even  begin  to  export  wool  and  cotton 
cloth  to  England.  This  change  in  the  course  of  trade 
would  finally  oblige  England  to  ship  money  to  the 
United  States  to  pay  for  an  excess  of  imports.  This 
money  would  raise  prices  in  America  while  English 
prices  would  fall,  until  some  American  exports  would  be 
shut  off  and  some  English  exports  would  increase. 


INTERNATIONAL    VALVES.  349 

From  this  illustration  we  draw  the  following  conclu- 
sions, which  are  valid  explanations  of  the  characteristics 
of  international  trade  :  — 

1.  Shipments  of  money  in  payment  of  balances  of 
indebtedness    constantly   cause    changes    in 

,       ,       ,  i       •       ji  ,  Conclusions, 

prices,   and    check   exports   in   the   country 

receiving  the  money,  while   increasing  exports   in    the 

country  that  makes  the  shipments. 

2.  Changes  in  prices  caused  in  this  manner  cut  off 
the  exports  of  those  commodities  in  which  there  is  the 
smallest  difference  between  domestic  and  foreign  prices. 

3.  Those  commodities  in  which  there  is  the  greatest 
difference  between  domestic  and  foreign  prices  will  be 
continuously  exported  in  spite  of  changes  in  prices. 

4.  The  normal  result  will  be,  in  the  long  run,  that 
each  country  exports  mainly  those  commodities  that 
show  the  greatest  difference  between  domestic  and 
foreign  prices.  Exports  of  other  goods  can  be  merely 
intermittent.  Now,  those  commodities  that  can  be  pro- 
duced at  the  greatest  advantage  in  price  over  foreign 
producers  are  the  ones  for  the  production  of  which  the 
country  offers  the  best  advantages  at  the  time  being. 
^iher  commodities  are  produced  at  a  less  advantage  as 
compared  with  foreign  producers,  precisely  because 
labor  and  capital  are  less  efficient  in  producing  them. 
To  apply  this  principle  practically,  we  may  say  that  the 
wheat,  cotton,  meats,  oils,  iron  and  steel,  cattle,  wood, 
tobacco,  leather,  copper,  and  manufactured  cottons  that 
form  the  principal  exports  from  the  United  States  at  the 
present  time  are  the  commodities  which  our  merchants 


350  PRINCIPLES   OF  ECONOMICS. 

can  sell  in  the  markets  of  the  world  at  the  greatest 
advantage  over  foreign  producers.  The  coffee,  sugar, 
wool,  hardware,  cotton  and  woolen  manufactures,  and 
the  silk  that  we  import  are  goods  for  whose  production 
our  advantages  are  not  so  great.  We  might  produce  all 
our  woolen  and  cotton  goods  in  this  country,  instead  of 
importing  a  part  of  them  as  at  present.  But  our  capital 
and  labor  can  do  other  things  more  advantageously,  and 
so  flow  naturally  into  the  production  of  those  commodi- 
ties for  which  we  have  unparalleled  advantages. 

§  237.    Movements   of   money    from    one   country  to 

another  tend  to  make  exports  and  imports  of  commodi- 

The  determi-    ^es   equal  in    the  long   run.     When    other 

nation  of        international  obligations  make  a  country  a 

values  in  in- 
ternational     debtor  to  foreign  nations,  exports  may  ex- 
exchange.       CQQ^  imports   by  the  amount   of  this   debt. 
Conversely,  when  a  country  has  foreign  debtors,  imports 
may  exceed  exports  proportionately. 

A  country's  exports  represent  the  demand  of   other 

countries  for  her  products,  while  the  imports  represent 

,.    .       her   demand   for   the    products   of    foreign 

Equalization  r  ° 

of  internation-  countries.  The  course  of  business  tends 
constantly  to  equalize  a  country's  demand 
for  foreign  products  and  the  foreign  demand  for  her 
own  products,  through  changes  in  prices  caused  by 
shipments  of  money.  An  increased  demand  for  foreign 
products,  causing  an  excess  of  imports,  will  start  ship- 
ments of  money  to  foreign  countries,  and  lower  domestic 
prices.  Exports  will  increase  on  this  lower  level  of 
prices  until   they  equal  imports  again.     An  increased! 


RESTRICTION  OF  INTERNATIONAL   TRADE.     851 

demand  for  foreign  products  tends  to  lower  the  prices 

of  exports  ;   that  is,  it  tends  to  render  less  favorable 

the   terms   on   which   foreign    products    are    paid    for. 

Conversely,  an  increased  foreign  demand  for  a  nation's 

products  tends  to  produce  an  excess  of  exports,  and 

shipments  of  gold  from  foreign  countries.     This  lowers 

prices  in  foreign  countries  so  that  they  can  pay  for  the 

larger  quantity  of  goods  demanded  by  exporting  more 

goods  on  the  lower  level  of  prices.     Foreign  trade  is 

more  or  less  profitable  to  a  nation  in  proportion  as  its 

demand  for  foreign  products    is   less   strong  than  the 

foreign  demand  for  its  products. 

A  country  that  exports  principally  raw  materials  will 

have  to  incur  heavier  expenses  for  freightage  than  a 

country    whose    exports    consist   mainly    of 

J  r  J  The  burden 

manufactured  goods.  These  heavier  freight  of  freight 
charges  for  raw  materials  raise  the  prices 
that  must  be  asked  in  foreign  countries ;  hence,  tend  to 
decrease  the  demand  for  the  products  of  the  country  that 
exports  raw  materials.  Freight  charges  on  manufactured 
goods  affect  prices  less,  and  tend  less  to  decrease  the 
foreign  demand. 

IV.  Restriction  of  International  Trade. 

§  238.    International  trade  is  restricted  to  a  greater 
or  less  degree  by  imposing  customs  duties  upon  goods 
that    cross    the    borders    of    any    country.    Cust0m8  taxes 
Duties  imposed  upon  goods  leaving  a  coun-  orduties- 
try  are  called  export  duties,  and  are  not  very  common 
at  the  present  day.     But  goods  brought  into  a  country 


352  PRINCIPLES   OF  ECONOMICS. 

are  often  taxed  by  import  duties.  Import  taxes  are 
specific  or  ad  valorem  according  as  they  are  assessed 
proportionately  to  the  bulk  of  the  commodities  or  to  the 
value. 

§  239.    Sometimes  import  duties  or  tariffs  are  imposed 
solely   to  secure  revenue   for   the  government.     When 
a  revenue       *a^   ^or   *ne  sole  purpose  of   revenue,  the 
tariff.  duties  are  made  high  enough  to  secure  the 

maximum  revenue,  but  not  so  high  as  to  discourage  im- 
portation more  than  is  inevitable.  The  English  revenue 
tariff  aims,  as  far  as  possible,  to  tax  only  commodities 
that  do  not  come  into  competition  with  products  of  home 
industries.  This  is  done  with  a  view  to  interfering  as 
little  as  possible  with  business  conditions.  Such  a 
revenue  tariff  will  normally  raise  the  price  of  the  arti- 
cles taxed  by  about  the  amount  of  the  duties.  Importers 
who  bring  tea  into  England  pay  the  government  about 
$17,000,000  annually  in  customs  duties,  and  then  in- 
crease proportionally  the  prices  charged  for  the  goods. 
Indeed,  the  increase  will  usually  be  rather  more  than 
this,  since,  in  order  to  pay  duties,  importers*  must  have 
larger  capitals  invested  in  the  business  ;  and  the  inter- 
est on  these  increased  capitals  must  also  be  paid  by 
consumers. 

When  duties,  laid   for   the  main  purpose  of   raising 

revenue,  are  imposed  upon  imported  commodities  that 

do  compete   with   products  of  domestic  in- 

Revenue  tariff  *  ' 

with inciden-  dustrv,  a  customs    tariff   gives  "incidental 

protection"   to   domestic   producers.      Mer- 
chants cannot  import  competing  foreign  products  with- 


RESTRICTION  OF  INTERNATIONAL   TRADE.       353 

out  having  to  pay  the  customs  tax  besides  the  price  paid 
the  foreign  producer.  Thus  imported  articles  can  be 
sold  only  at  higher  prices  than  formerly,  and  domestic 
producers  may  profit  by  increased  prices  of  competing 
foreign  products.  The  earliest  tariffs  imposed  in  the 
United  States  were  revenue  tariffs  that  purposely  gave 
to  domestic  producers  "  incidental  protection." 

§  240.    The  restriction  of  foreign  commerce  that  fol- 
lowed the  embargo  in  1807,  and  then  the  War  of  1812, 
cut  off  most  imports  until   the  year  1815.     protective 
This  removal  of  foreign  competition  led  to     tarms- 
a  rapid  growth  of  textile  manufactures.     Many  of  these 
textile  establishments  were  poorly  conducted,  and  when 
foreign  competition  began  again  in  1815,  there  arose  a 
demand   for  more   highly   protective    duties.     In    1816 
customs   duties  were   raised,  particularly  upon  cottons 
and  woolens  ;  and  the  tariff  became  a  distinctly  protect- 
ive tariff.      From  that  time  to  the  present  the  tariff 
laws  of  the  United  States  have  maintained  a  strong  pro- 
tective character,  although    from  1846  to  1861  duties 
were  reduced   toward   a  revenue    basis.      In   1861    the 
Morrill  Tariff  Act  restored  duties  to  about  the  level  of 
1845,  but  increased  the  duties  on  iron  and  wool.     Then 
ensued  the  Civil  War,  in  which  the  United  States  was 
obliged  to  lay  its  hands  upon  every  source  of  revenue. 
In  1862  and  1864  "  war  tariffs  "  were  passed  imposing 
duties  upon  every  possible  import,  and  raising  the  rates. 
Moreover,  very  heavy  internal   taxes  had  been   placed 
upon  most  important   domestic  manufactures ;  and  for 
this  reason  "  compensatory  "   increases  of  duties  were 


354  PRINCIPLES  OF  ECONOMICS. 

placed  upon  imports.1  After  the  Civil  War  the  ex- 
penses of  the  government  decreased,  and  a  reduction 
of  taxes  began.  Most  of  the  internal  taxes  were  re- 
pealed, but  the  war  tariff  was  not  lowered.  Even  the 
heavy  "  compensatory  "  duties  on  imports  were  retained 
after  the  repeal  of  the  internal  taxes  that  had  caused 
them  to  be  imposed.  In  1867  a  moderate  reduction  of 
duties  was  voted  by  the  Senate,  and  received  a  majority 
vote  in  the  House,  but  failed  to  pass  the  latter  body 
because  a  two  thirds  vote  necessary  to  suspend  the  rules 
could  not  be  secured.  For  nearly  twenty  years  the  war 
tariff  of  1864  remained  unchanged  in  important  particu- 
lars. In  1883  some  duties  were  lowered,  but  others 
were  raised,  and  the  general  character  of  the  tariff  re- 
mained the  same.  In  1890  the  McKinley  tariff  removed 
revenue  duties  on  raw  sugar  and  some  other  articles,  but 
increased,  on  the  whole,  the  protective  duties  on  articles 
that  competed  with  domestic  products.  Then,  in  1894, 
the  Wilson  tariff  placed  wool,  copper,  and  lumber  upon 
the  free  list ;  re-imposed  a  revenue  duty  upon  raw  sugar  ; 
and  reduced  irregularly  the  duties  upon  protected  com- 
modities. Finally,  in  1897,  the  Dingley  tariff  was 
enacted.  This  left  copper  on  the  free  list,  and  lowered 
the  duty  on  steel  rails;  but  it  increased  considerably 
most  of  the  other  duties.  Wool  and  lumber  were  put 
back  into  the  dutiable  list,  and  a  tax  was  placed  on 
hidos  which  had  long  been  admitted  free  of  duty.  In 
some  cases,  as  with  wool,  the  duties  were  made  higher 
than  ever  before.  This  law  also  substituted  many 
specific  duties  in  the  place  of  ad  valorem.     Upon  the 


RESTRICTION   OF  INTERNATIONAL   TRADE.      355 

average,  it  imposes  upon  dutiable  imports  a  tax  of  about 
fifty  per  cent  of  the  value  of  the  goods. 

§  241.    The  general  effect  of  a  protective  duty  has  been 
staled  by  a  leading  protectionist  journal  in  such  a  clear 
manner  as  to  command    the  entire    assent  The  general 
of   one  of   the   leading   free-traders  of   the  proetCecuVe 
United  States :  "  A  protective  duty  .  .  .  has  duty- 
for  its  object  to  effect  the  diversion  of  a  part  of  the  capi- 
tal and  labor  of  the  people  out  of  the  channels  in  which 
it  would  run  otherwise   into  channels  created  or  favored 
by  law."  l     Before  considering  what  is  involved  in  thus 
diverting  capital  from  one  industry  to  another,  the  stu- 
dent must  be  reminded  that  there  is  often  a  difference 
between  the  immediate  and   the  permanent   results  of 
economic  causes.     Both  need  to  be  considered,  but  it  is 
easy  to  lose  sight  of  the  things  that  hold   true  in  the 
long  run. 

§  242.    The  immediate  effect  of  levying  a  protective 

duty   (say  of  fifty  per  cent)  upon  a  foreign  product  is 

to  increase  by  that  amount  the  expense  of  Detalled 

importing  the    commodity.     This    normallv   effects  of  a 

.  .  n      protective 

increases  the  price  at  which  the  foreign  prod-  duty. 

net  must  be  sold.      If  the  foreign  product  establishment 

formerly  sold  at  one  dollar,  the  protective  of  a  particular 

J  industry, 

duty  will  regularly  raise  its  price  to  about 

one  dollar  and  a  half.  This  increased  price  is  intended 
to  induce  domestic  capital  to  enter  this  industry.  Man- 
ifestly if  domestic  producers, before  the  duly  was  imposed, 
could  have  made  a  fair  average  profit  from  manufacturing 
1  From  Philadelphia  American.     See  Sumner,  Protectionism,  16,  17. 


356  PRINCIPLES   OF  ECONOMICS. 

and  selling  the  commodity  at  one  dollar,  no  duty  would 
have  been  needed  to  insure  the  investment  of  capital  in 
this  industry.  The  prospect  of  securing  more  than  one 
dollar  for  the  commodity  may  make  it  profitable  for 
capitalists  to  undertake  to  produce  it  at  home. 

The  establishment  of   such   a  "  protected  industry " 

adds  nothing  to  the  total  amount  of  labor  and  capital 

2.  Does  not     permanently  invested   in   the   country.      It 

add  to  the        merely  diverts   capital  and  labor  from  old 

total  industry  -  * 

of  the  country,  industries  or  from  the  establishment  of  other 
new  industries  that  would  have  been  profitable  without 
protection.  A  slight  exception  to  this  principle  occurs 
when  a  protective  duty  invites  foreign  capital  which 
ivould  not  have  come  to  the  country  otherivise.  But  the 
amount  of  foreign  capital  brought  to  the  United  States 
by  the  tariff  has  never  been  more  than  a  very  small 
per  cent  of  the  new  capital  invested  in  industry  each 
year. 

The  immediate  effect  of  establishing,  by  a  protective 

duty,  an  industry  that  would  not  have  been  profitable 

otherwise,  is  to  attract  into  a  less  produc- 

immediateiy    tive  industry  capital  that  would  have  been 

less  productive  mvestcci  m  more  productive  channels.    "What 

Industries  in  l 

place  of  more  js  it  that  makes  it  possible  for  some  Ameri- 
can producers  of  wheat,  corn,  cattle,  iron  and 
steel  products,  cotton  and  cotton  goods,  leather,  boots 
and  shoes,  tobacco,  and  oils  to  sell  their  products  in 
foreign  countries  at  prices  that  enable  them  to  compete 
with  any  producers  in  the  world,  while  other  American 
producers  cannot  do  so  ?     Simply  the  fact  that  the  first 


RESTRICTION  OF  INTERNATIONAL    TRADE.       357 

class  of  producers  enjoys  exceptional  facilities.  A  pro- 
tective duty  upon  articles  that  we  cannot  as  yet  produce 
as  cheaply  as  certain  foreign  producers,  simply  invites 
capital  away  from  industries  where  we  have  unparalleled 
advantages  into  industries  where  our  facilities  are  not 
so  good.  Its  immediate  effect,  therefore,  must  he  to 
decrease  the  productivity  of  the  capital  invested  in  the 
protected  industry,  and  to  cause  economic  loss. 

But  it  may  happen  that  the  industry  established  by  the 
protective  duty  will  prove  to  be  one  for  which  our  pro- 
ducers have  first-rate  facilities.     Inexperience  4.  Mayexer- 
or   other   initial  difficulties  may  have  been  cise a "2* ent 

J  permanent 

the  only  causes  that  prevented  capitalists  effect, 
from  making  a  profit  by  producing  the  product  at  the 
price  of  one  dollar.  It  may  happen  that,  in  a  few  years, 
the  domestic  producers  can  overcome  these  difficulties, 
and  make  a  profit  by  selling  the  commodity  at  as  low 
a  price  as  the  foreign  producers.  When  this  occurs, 
the  industry  would  prove  self-sustaining  if  the  duty 
were  removed ;  and  it  would  become  a  more  profitable 
instead  of  a  less  profitable  industry.  Then  the  eco- 
nomic loss  would  cease,  and  the  ultimate  result  of  the 
protective  duty  would  have  been  to  hasten  the  establish- 
ment of  the  industry.  The  word  hasten  is  italicized 
because  such  an  industry  would  be  one  for  which  the 
country  had  good  advantages, —  one  which  would  have 
been  quite  sure  to  be  established  without  protection, 
as  the  labor  and  capital  force  of  the  country  increased. 
Protective  duties  may  hasten  the  growth  of  such  enter- 
prises ;  but  the  economist  must  insist  that  they  cause 


358  PRINCIPLES  OF  ECONOMICS. 

a  less  productive  use  of  capital,  hence  an  economic  waste, 
until  the  industry  becomes  self-supporting.  Then  the  duty 
should  be  removed,  and  the  economic  waste  would  cease. 
It  is  possible  that  experience  under  a  protective  duty 
may  show  that  the  protected  industry  does  not  enjoy 
5.  May  fan      such  great  advantages  that   producers  can 

seSusfiLg  afford  t0  sel1  at  the  Prices  charged  by  for- 
industries.  eigners  (in  this  assumed  case,  one  dollar). 
This  is  merely  a  demonstration  that  the  industry  does 
not  enjoy  such  superiority  over  foreign  producers  as 
other  industries  of  the  country  possess.  A  protected 
industry  that  does  not  become  self-supporting  causes  a 
permanent  economic  waste.  The  labor  and  capital  in- 
vested in  it  could  have  been  employed  more  profitably  in 
some  other  industry.  The  disadvantage  of  the  domestic 
producer  over  the  foreigner  may  not  be  as  great  as  the 
duty  of  fifty  per  cent  imposed  upon  the  foreign  product. 
Domestic  producers  may  be  able  to  produce  the  protected 
commodity  at  a  price  of  -$1.25.  If  there  is  effective 
competition  among  producers,  the  price  will  be  fixed  at 
that  figure.  Then  the  protective  duty  of  fifty  per  cent 
will  have  the  ultimate  effect  of  raising  the  price  of  the 
commodity  only  twenty-five  per  cent.  In  all  cases,  pro- 
tective duties  raise  the  price  of  the  commodity  by  the 
increased  money  expense  at  which  domestic  producers 
turn  out  the  article.  If  domestic  producers  could  afford 
to  sell  the  protected  commodity  as  cheaply  as  the  foreign 
producers,  no  protective  duty  would  be  needed  to  estab- 
lish or  to  maintain  the  industry.  But  it  has  happened 
that  domestic  producers  in  the  United  States  have  com- 


RESTRICTION  OF  INTERNATIONAL    TRADE.       359 

bincd  to  raise  prices  behind  the  barriers  of  the  protective 
duty.  Thus,  in  the  case  assumed  here,  the  domestic 
producers  might  be  able  to  sell  the  commodity  profitably 
at  a  price  of  $1.25.  If  they  form  a  combination,  they 
can  maintain  the  price  at  $1.45  or  $1.49,  because  the 
duty  excludes  foreign  competition  at  any  price  under 
$1.50.  As  a  matter  of  fact,  a  number  of  important  pro- 
ducts are  regularly  sold  to  foreign  customers  at  prices 
lower  than  those  charged  to  American  consumers. 

All  agree  that  when  a  revenue  duty  is  imposed  upon 
a  foreign  product  that  is  not  produced  by  any  domestic 

industry,  importers  add  practically  the  whole 

*  '        '  '  J  6.  Effect  upon 

duty  to  the  price  charged  domestic  consum-  the  foreign 
ers.  The  exceptions  to  this  principle  are 
not  important  enough  to  require  mention  here.  But 
there  is  a  dispute  as  to  whether  the  foreign  producer  or 
domestic  consumer  bears  the  burden  of  a  protective  duty 
laid  on  competing  foreign  products.  The  principles  laid 
down  in  the  preceding  paragraphs  enable  the  question  to 
be  answered  briefly.  A  protective  duty  can  be  deemed 
necessary  to  maintain  an  industry  only  so  long  as 
domestic  producers  are  unable  to  produce  the  com- 
modity as  cheaply  as  foreigners.  If  foreigners  can  sell 
the  protected  article  for  one  dollar,  and  domestic  pro- 
ducers cannot  afford  to  sell  it  for  less  than  $1.25,  then 
the  price  will  be  $1.25  if  the  domestic  producers  are 
able  to  supply  practically  all  the  domestic  demand,  and 
if  they  do  not  combine  to  raise  prices  to  $1.49,  the  limit 
set  by  the  liftv-per-cent  duty  on  the  foreign  product.  In 
such  a  case  domestic  consumers  bear  a  burden  of  twentv- 


860  PRINCIPLES  OF  ECONOMICS. 

five  cents  on  each  commodity  bought.  Foreign  producers, 
moreover,  will  be  unable  to  sell  their  goods  in  the  domes- 
tic market  unless  they  reduce  the  cost  of  production  or 
adulterate  their  products,  so  that  they  can  sell  at  $1.25 
after  paying  the  duty.  If  they  have  other  markets, 
they  will  cease  to  sell  their  products  in  the  country  that 
lays  the  duty.  If  they  cannot  find  other  markets  for 
all  their  goods,  they  will  try  to  cheapen  their  products 
in  some  way  or  other,  or  may  temporarily  sell  at  a  lower 
margin  of  profits.  It  may  happen  that  a  part  of  the 
burden  of  a  protective  tax  can  be  thrown  temporarily 
upon  the  foreign  producers  in  this  manner,  but  domestic 
consumers  are  sure  to  bear  a  burden  proportioned  to  the 
greater  money  expense  at  which  the  domestic  product  is 
produced.  This  burden  on  consumers  ceases  only  when 
the  domestic  money  cost  of  production  becomes  as  low 
as  the  foreign  cost.  But  then  the  protective  duty  is  no 
longer  necessary  to  maintain  the  industry.  Finally,  if 
the  protective  duties  laid  in  America  may  throw  part  of 
their  burden  upon  the  foreign  producers,  it  is  also  true 
that  protective  duties  imposed  by  France,  Germany,  and 
other  foreign  countries  may  throw  part  of  their  burden 
upon  the  American  exporter. 

If  one  or  two  industries  only  are  given  protection, 
7.  one  protect- ^iey  wi\\  profit  by  the  increased  prices  that 
ive  duty  may    can  ne  sccure(j  for  their  products.      But  if 

neutralize  the  J 

advantages      protective  duties  are  extended  to  many  in- 

that  domestic      i       .    •  ,  i      ,    ,  i  •  r  i 

producers  gain  dustrics,  so  that  the  prices  ot  many  commod- 

from  others,     jfies  are  increased,  then  the  duties  conflict 

with  each  other.      One   industry  may  be  given  protec- 


RESTRICTION  OF  INTERNATIONAL   TRADE.       361 

tion.  Then  other  protective  duties  are  almost  certain  to 
increase  the  prices  of  the  materials  or  products  necessary 
to  build  and  equip  the  plants  ur.ed  in  the  first  industry. 
Most  American  producers  pay  more  for  some  i  the 
materials  and  products  used  in  equipping  aud  running 
their  industries  than  would  be  necessary  without  the 
protective  duties.  They  arc  placed  at  just  so  much  of 
a  disadvantage  as  compared  with  English  producers, 
who  are  able  to  buy  all  necessary  materials  in  the 
cheapest  markets.  This  increased  expense  of  establish- 
ing and  running  a  business  has  prevented  many  Ameri- 
can industries  from  becoming  able  to  compete  success- 
fully with  foreign  producers. 

§  243.  The  cost  of  producing  a  commodity  is  seldom 
exactly  the  same  in  any  two  establishments.  Within 
any  industry  there  may  be  ten  or  fifty  differ-  Dif f erent  cort8 
ent  costs  of  production.  Some  establish-  of  production, 
ments  barely  manage  to  pay  expenses,  while  others  make 
large  profits  from  selling  at  the  same  prices  that  the 
first  establishments  receive.  In  protected  industries 
some  establishments  may  be  self-supporting  and  able  to 
sell  at  as  low  prices  as  foreign  producers  can  offer,  while 
others  would  be  crushed  by_  foreign  competition  if  the 
protective  duty  should  be  removed.  This  is  true  of 
most  of  the  protected  industries  at  this  moment. 

§  244.    Protective  duties  can  divert  capital  and  labor 

from  one  industrv  to  another,  but  the}7  can-  _ 

1  What  protect- 

not  do  many  things  that  they  are  believed  to  ive  duties 

, .  ,  cannot  do. 

accomplish. 

Protective  duties  do  not  increase  the  wealth  of  the 


302  PRINCIPLES   OF  ECONOMICS. 

country,  as  long  as  they  are  needed  to  maintain  pro- 
tected  industries   in   existence.     Until   the 

They  do  not 

increase  protected  industry  becomes  able  to  produce 
at  as  low  money  cost  as  foreign  indus- 
tries, there  is  a  constant  loss.  It  may  happen  that  a 
protective  duty  may  hasten  the  establishment  of  an 
industry  which  becomes  self-supporting  and  exceedingly 
profitable.  In  such  a  case  the  protective  duties  cause 
an  initial  loss  that  may  be  counterbalanced  by  the  ulti- 
mate gain  of  creating  a  very  productive,  self-sustaining 
industry  earlier  than  it  would  have  been  established 
otherwise.  In_  other  cases,  protective  duties  divert 
capital  from  more  productive  to  less  productive  channels 
of  investment,  and  cause  a  distinct  loss. 

Protective   duties   cannot   increase   permanently   the 

total  industry  of  a  country,  as  we  have   seen   (§  242). 

They  do  not     It  is  sometimes  said,  for  instance,  that  if  we 

^Tl^L,  had  not  imported  131,206,000  of  silk  goods 

total  industry  l  ° 

of  a  country,  in  1895,  we  should  have  given  just  so  much 
more  employment  to  domestic  labor  and  capital.  But 
the  labor  and  capital  needed  to  produce  those  silk  im- 
ports would  merely  have  been  diverted  from  some  other 
industry  in  which  they  would  have  found  investment 
sooner  or  later.  In  such  a  year  as  1895,  when  uncer- 
tainty as  to  the  future  of  our  currency  was  paralyzing 
all  business,  it  is  probable  that  we  had  considerable  un- 
employed labor  and  capital,  some  of  which  might  have 
found  investment  in  the  silk  industry.  But,  even  in 
this  case,  increased  protective  duties  would  merely  havo 
caused  this  amount  of  labor  and  capital  to  be  invested 


RESTRICTION  OF  INTERNATIONAL    TRADE.       363 

earlier  than  otherwise.  It  would  have  caused  no  perma- 
nent increase  of  business.  Moreover,  these  #31,200,000 
of  silk  imports  were  paid  for  by  an  approximately  equiv- 
alent amount  of  exports.  If  a  protective  tariff  cuts  off 
suddenly  $31;206,000  of  imports,  it  will  not  instantly 
decrease  exports;  for  foreigners  will  buy  and  Americans 
will  sell  as  long  as  prices  make  it  profitable.  But  in  the 
long  run  a  decrease  of  #31,206,000  in  imports  will  cause 
exports  to  exceed,  imports  by  just  that  amount  from 
year  to  year.  Foreigners  will  be  unable  to  pay  for  this 
excess  of  exports  by  bills  of  exchange  drawn  against 
silk  goods  sold  to  Americans,  as  they  used  to  do.  Sooner 
or  later  they  must  pay  for  the  excess  in  money.  The 
inflow  of  money  will  ultimately  tend  to  raise  prices  and 
so  to  cut  off  the  export  of  goods  that  are  now  being  ex- 
ported on  a  narrow  margin  of  profit.  A  country  cannot 
export  unless  it  will  also  import.  A  reduction  of  imports 
by  protective  duties  will  ultimately  lead  to  a  decrease  of 
exports.  Finally,  protective  duties  may  lead  to  retalia- 
tory legislation  by  other  countries,  as  the  tariff  of  1890 
probably  did.  If  foreign  countries  increase  the  duties 
charged  on  the  articles  that  we  sell  them,  or  impose 
other  restrictions,  then  the  decrease  in  our  exports  may 
happen  immediately,  instead  of  coming  more  slowly 
through  changes  in  prices. 

It  is  said  sometimes  that  we  may  keep  our  money  at 
home  by  discouraging  imports  of  foreign  products.  It 
is  possible  of  course  to  diminish  imports  by  protective 
duties;  and  sometimes  such  action  may  cause  exports 
to  exceed  imports,  and  lead  to  a  net  importation  of  gold. 


364  PRINCIPLES   OF  ECONOMICS. 

But  such  a  condition  can  be  merely    temporary.      The 
movement  of  money  from  country  to  country  is  auto- 
matic, depending  upon   comparative  prices. 
They  do  not  ,,  \ 

increase  per-  If  we  continually  import  gold,  we  tend  to 
neTamount  of  raise  prices.  Higher  prices  diminish  ex- 
money  re-       ports.     If  the  first  decrease  of  exports  docs 

ceived  from       *  * 

foreign  not  stop  the  excess  of  exports  over  imports, 

then  prices  will  continue  to  rise  until  ex- 
ports fall  to  the  level  of  our  diminished  imports.  A 
country  will  secure  from  the  world's  stock  of  money 
enough  currency  to  enable  its  business  to  be  done 
at  the  general  level  of  prices  that  prevails  in  other 
countries.  Nor  can  it  permanently  retain  more  than 
this  amount. 

Wages   in  the  United    States  are  somewhat   higher 
than  in  England.     The  American  wage  earner  not  only 

They  cannot     receives    more     money     than    the    English 

increase  the     worker,  but  also  he  secures  with  his  money 

general  rate 

of  wages  in      a  greater  amount  of  commodities.     The  im- 

a  country.  p0rtant  thing  is  that  the  American  worker 
receives  more  food,  clothes,  shelter,  books,  etc.,  than  the 
English  laborer,  on  the  whole.  Now,  it  is  self-evident 
that  American  wages,  expressed  in  terms  of  commodi- 
ties, cannot  exceed  English  wages  unless  there  are  more 
commodities  produced  for  the  laborer  to  receive.  Real 
wages,  we  repeat,  cannot  be  greater  in  this  country, 
unless  our  industry,  as  a  whole,  is  productive  of  more 
commodities,  of  more  consumable  wealth.  Now,  a  pro- 
tected industry,  until  it  becomes  self-supporting  and 
no  longer  needs  protection,  is  not  as  productive  as  the 


RESTRICTION  OF  INTERNATIONAL    TRADE.       365 

unprotected  industries  which  always  have  hccn  self- 
sustaining.  Consequently,  a  protective  duty  lessens 
production,  and  decreases  by  just  so  much  the  commodi- 
ties available  for  the  support  of  laborer  and  capitalist 
alike.1 

§  245.  In  this  country  certain  industries  have  always 
been  phenomenally  productive,  that  is,  they  have  yielded 
an  unusually  large  product  for  each  unit  of  Relation  of  the 
invested  labor  and  capital.  Money  wages  J^eunTtef8 
in  these  industries,  particularly  in  agricul-  states, 
ture,  have  always  been  higher  than  in  Europe.2  Em- 
ployers could  afford  to  pay  higher  wages  because  the 
labor  was  so  productive  that  the  money  cost  of  produc- 
ing each  unit  of  product  was  small.  Now,  other  em- 
ployers could  not  induce  laborers  to  work  for  them 
unless  their  industries  were  productive  enough  to  en- 
able them  to  pay  wages  sufficient  to  induce  men  to 
keep  out  of  agriculture  and  other  self-sustaining  indus- 
tries. The  wonderful  natural  resources  of  our  country, 
which  are  unsurpassed ;  the  energy,  intelligence,  in- 
genuity, and  excellent  industrial  character  of  our  labor 

1  Of  course  this  presupposes  that  the  share  or  proportion  of  the  total 
product  that  goes  to  the  laborers  is  not  affected  permanently  by  the  pro- 
tective duty.  It  would  hardly  be  claimed  seriously  that  such  is  not  the 
case,  and  that  the  tariff  permanently  enlarges  the  share  of  the  laborers  in 
the  total  product.  Least  of  all  could  tin's  be  true  of  the  United  States, 
where  interest  and  profits  arc  generally  higher  than  in  most  European 
countries.  Neither  would  any  one  claim  that  manufacturers  who  favor 
protection  do  so  because  protective  duties  increase  the  proportion  of  the 
product  paid  to  laborers,  and  decrease  the  proportion  received  by  the 
employers. 

2  Evidence  ou  this  point  runs  back  to  the  year  1645.  See  §  1G  and 
§33. 


366  PRINCIPLES  OF  ECONOMICS. 

force,  —  these  are  the  causes  that  have  made  the  prod- 
uct of  our  total  industry  large,  and    have   raised  the 
amount  of  commodities  received  by  our  laborers  above 
the  level  of  wages  secured  in  foreign  countries.     There 
is  no  possible  way  by  which  the  industrial  population  of 
one  country  can  secure  more  commodities  than  foreign 
peoples  except  by  producing  more.     Prior  to  1789  wages 
were  high  without  protective  duties ;  since  that  date  they 
have  remained   higher  than  foreign  wages,  in  spite  of 
the  fact  that  protective  duties  have  diverted  some  capi- 
tal from  more  productive  to  less  productive  investments. 
The  fundamental  fact  for  the  student  to  consider  is 
that  employers  in  unprotected  industries  have  always 
paid  higher  money  wages  than  foreign  em- 
unprotected     ployers,  but  have  enjoyed  such  advantages 
in  natural  resources  and  efficient  labor  that 
they  could  afford  to  pay  more  money  wages,  and  yet 
sell  their  products  as  cheaply  as  the  foreign  producer. 
In  the  protected  industries  our  natural  advantages  and 
the  efficiency  of  our  labor  have  not  given  employers  so 
great  advantages  over  foreign  producers  as  our  unpro- 
tected industries  have   enjoyed.      Therefore  they  have 
been  unable  to  establish  business  enterprises  and  to  pay 
laborers  as  high  money  wages  as  unprotected  employ- 
ers could  offer,  without  having  the  price  of  their  prod- 
uct increased  by  a  tariff  duty.     This  increase  of  price 
merely    enabled  them  to   pay  the  high  rate  of  money 
wages  that  had  always   prevailed    in    ihe    unprotected 
industries.     The  removal  of  all  protective  duties  would 
not  affect  permanently  the  general  rate  of  wages.     It 


RESTRICTION  OF  INTERNATIONAL   TRADE.       367 

would  close  up  some  of  the  protected  establishments, 
and  the  laborers  employed  there  would  be  thrown  out 
of  employment.  These  unemployed  laborers  would  tem- 
porarily cause  an  over-supply  of  labor,  and  their  com- 
petition might  reduce  money  wages  in  some  other 
industries.  But  sooner  or  later  these  displaced  labor- 
ers would  find  employment  in  new  self-sustaining  in- 
dustries, and  money  wages  would  rise  again.  The 
result  would  be  like  the  invention  of  a  labor-saving 
machine  that  throws  thousands  of  laborers  out  of  em- 
ployment. Temporarily  these  unemployed  laborers  fend 
to  depress  wages  in  other  industries.  Ultimately  they 
find  employment  in  new  industries  made  possible  by 
the  invention  of  the  machine  ;  and  wages  do  not  per- 
manently remain  depressed. 

In  this  country  the  relative  number  of  laborers  whose 
employment  in   protected   industries    depends    directly 
upon  the  protective  tariff  is  usually  exag-  The  number  of 
ge rated.     In   1880,  it   appeared   that  there  laborers  **" 

°  rx  fected  by  pro- 

were  7,299,000  farmers   who  were   not  af-  tective  duties 
fected     directly    by    the    tariff.1     Further,  tiv^iyinuie 
5,884,000  producers,  engaged   in   trade   or  United  states- 
transportation,  or  in  professional  and  personal  services, 
were   not   affected   directly    by    the   tariff,  since    their 
work  has  to  be  done   in   this   country  and   cannot   be 
done   abroad.     Finally,  3,837,000  producers    were   em- 
ployed   in    manufactures,  mining,  and  mechanical  pur- 

1  This  figure  excludes  ouc  half  the  agricultural  population  of  Maine, 
New  Hampshire,  Vermont,  and  New  York  as  possibly  affected  by  Cana 
diaii  competition.     See  Laughlin,  iii  Shaw,  National  Revenues,  181-184 


368  PRINCIPLES  OF  ECONOMICS. 

suits.  But  of  these,  2,216,848  were  employed  as  bakers, 
blacksmiths,  carpenters,  masons,  etc.,  —  whose  work  must 
be  done  in  this  country  and  cannot  be  done  elsewhere, — ■ 
or  were  employed  producing  goods  that  were  exported 
to  foreign  markets  and  sold  at  prices  as  low  as  any  in 
the  world.  This  made  about  15,400,000  workers  who 
were  not  directly  dependent  upon  the  tariff  for  their 
employment,  and  only  1,990,000  laborers  whose  posi- 
tions could  be  directly  affected  by  protective  duties.1 
Even  of  these  1,990,000  laborers  in  the  so-called  pro- 
tected industries  it  is  probable  that  many  were  em- 
ployed in  establishments  of  superior  efficiency  which 
would  not  be  obliged  to  close  by  a  withdrawal  of  pro- 
tective duties.  These  figures  show  the  absurdity  of 
supposing  that  the  wages  of  less  than  1,990,000  pro- 
tected laborers  were  able  permanently  to  keep  the 
wages  of  15,400,000  unprotected  laborers  fifty  per  cent 
above  the  wages  paid  in  foreign  countries. 

§  246.    While  protective   duties   do   not   add   perma- 
nently to  the  invested  capital  or  the  total  industry  of 
The  advisaMi-  a    country,    and    while    they   do  cause    an 

ity  of  i mpos-  .      ,  .  .  .     -i    • 

ing  protective  economic  loss  as  long  as  the  protected  m- 
duties.  dustries  are  not  self-supporting,  it  is  some- 

times possible  to  favor  them  on  other  grounds.  The 
economic  waste  of  sustaining  by  protection  an  industry 

1  The  Census  of  1890  shows  the  following  results  :  agriculture,  8,406,251 
persons;  professional  and  personal  services,  5,304,829  persons;  trade  and 
transportation,  3,325,962  persons;  manufactures,  mechanics,  and  mining, 
5,638,619  persons.  By  consulting  Extra  Census  Bulletin,  No.  99,  May  18, 
1895,  the  student  can  make  the  necessary  deductions  from  Class  i.  and 
Class  iv. 


RESTRICTION  OF  INTERNATIONAL   TRADE.       369 

that  is  not  self-supporting  should  be  frankly  admitted, 
but  it  may  be  fairly  argued  that  sometimes  this  economic 
loss  is  counterbalanced  by  a  greater  gain. 

Political  reasons  make  it  very  advisable  that  a  nation 
should  be  able  to  produce  its  own  military  armaments 
and  materiel  of  war.     Also,  it  may  be  polit-     Protective 

duties  may 

ically  advisable  for  a  nation  to  produce  its     be  justified 
principal  necessities  of  life,  in  order  to  be     ™0undslcal 
independent  of  other  nations  in  case  of  war.     Military 
and  political  considerations   often   must  outweigh  con- 
siderations of  a  purely  economic  character. 

In  a  new  country,  such  as  the  United  States  a  cen- 
tury ago,  capital  is  often  scarce,  as  compared  with  the 
demand   for  it ;    the  labor  force  is  insuffi-     Protection 

to  infant 

cient  and  high-priced  ;  and  the  money  ex-  industries, 
penses  for  capital  and  labor  are  high.  These  greater 
expenses  retard  the  development  of  industries  where 
unusual  natural  resources  cannot  be  utilized  immedi- 
ately, where  the  greater  efficiency  of  labor  and  capital 
does  not  compensate  immediately  for  their  greater  cost. 
In  the  infancy  of  a  country's  industrial  development  it 
may  be  wise  to  aid  a  few  industries  by  protective  duties. 
These  duties  raise  the  prices  more  or  less,  but  they 
enable  the  employer  to  overcome  the  initial  disadvan- 
tages that  confront  him.  Such  protection  should  be 
extended  for  a  reasonable  time  only,  until  the  infant 
industry  can  get  upon  its  feet  and  support  itself. 
But  each  case  in  which  protection  is  demanded  should 
be  considered  very  carefully  upon  its  own  merits. 
Moreover,   such    protection    can   be   extended   only    to 


370  PRINCIPLES   OF  ECONOMICS. 

a  few  industries.  If  protective  duties  are  levied  on 
all  possible  competing  products,  one  tends  to  neutral- 
ize the  advantage  conferred  by  another.  Protective 
duties  must,  so  long  as  they  are  needed  to  support  an 
industry,  give  that  industry  encouragement  at  the  ex- 
pense of  all  who  pay  the  higher  prices.  If  the  protected 
industry  soon  becomes  self-supporting,  then  the  duty 
may  be  abolished,  and  the  industry  may  be  thenceforth 
advantageous  to  all  interests.  The  danger  with  protect- 
ive duties  designed  to  foster  infant  industries  is  that  the 
infants  are  seldom  willing  to  give  up  the  protection  once 
accorded  to  them.  In  this  ccimtry,  after  eighty  years  of 
protection,  our  "  infant  industries  "  oppose  the  removal 
of  the  protective  duties.  At  the  present  time  the  infant- 
industry  argument  has  little  force  when  applied  to  the 
conditions  existing  in  the  United  States,  for  this  coun- 
try is  no  longer  in  its  industrial  infancy. 

It  is  impossible  to  discuss  in  this  chapter  all  of  the 

arguments  advanced  in  favor  of  protective  duties,  but 

other  argu-     the  student  should    examine   them   in   the 

mentsfor        ijp-ht  of  the  principles  explained  in  the  pre- 

protective  c  r  r  i  i 

duties.  ceding  paragraphs.1     One  of  these  is   con- 

nected with  the  infant-industries  argument.  It  is 
claimed  that  a  young  or  an  undeveloped  country  needs 
protection  in  order  to  diversify  its  industry.  Without 
protective  duties,  the  young  country  will  devote  all  its 
energy  to  the  production  of  a  few  raw  materials  for 
which  it  has  great  advantages  ;  it  will  not  utilize  its 

1  See  Smith,  Wealth  of  Nations,  Bk.  iv.  Chap.  2,  fur  a  few  other  cases 
where  protective  duties  may  be  justified. 


RESTRICTION  OF  INTERNATIONAL   TRADE.       371 

other  natural  resources  ;  and  will  give  no  opportunity 
for  the  development  of  the  skill  that  its  population 
may  possess  for  manufacturing  pursuits.  In  a  country 
possessed  of  few  natural  advantages,  whose  inhabi- 
tants have  little  energy,  self-reliance,  or  progressivencss, 
it  might  be  advantageous  to  resort  to  a  few  protective 
duties  in  order  to  give  labor  and  capital  the  initial  im- 
pulse toward  a  diversification  of  industries.  This  policy 
would  cause  loss,  and  would  be  expensive  ;  but  it  might 
have  certain  advantages  in  the  long  run.  In  the  United 
States  such  considerations  have  very  little  force.  Our 
natural  resources  are  too  numerous  and  varied  to  make 
it  possible  for  us  to  be  shut  up  to  the  production  of  raw 
materials.  In  the  eighteenth  century,  in  spite  of  English 
competition  and  in  the  face  of  Parliament's  prohibitory 
legislation,  we  established  several  lines  of  manufactures. 
After  1789  our  capital  and  labor  were  invested  in  foreign 
commerce,  until  we  did  a  large  part  of  the  carrying 
trade  of  the  world.  This  was  accomplished,  not  "  by 
protection  and  bounties,  but  by  unwearied  exertion,  by 
extreme  economy,  by  unshaken  perseverance,  by  that 
manly  and  resolute  spirit  which  relies  on  itself  to  pro- 
tect itself."  l  Since  1816,  there  have  been  periods  when 
protective*  duties  may  reasonably  be  claimed  to  have 
hastened  the  growth  of  manufactures,  but  it  cannot  be 
shown  that  manufacturing  industries  would  not  have 
continued  to  develop,  even  without  temporary  protection. 
It  can  be  seen  that   differentiation   of  industry  would 

1  See  Webster's  speech  of  1824,  State  Papers  and  Speeches  ou  the 
Tariff,  330. 


372  PRINCIPLES   OF  ECONOMICS. 

have  taken  place  without  protection,  if  we  merely  look 
at  what  has  happened  in  the  internal  trade  of  the  coun- 
try. The  Constitution  assured  us  freedom  of  trade 
throughout  the  length  and  breadth  of  our  land.  Now, 
have  the  newer  sections  been  unable  to  diversify  their 
industries  in  the  face  of  the  competition  of  the  further- 
developed  industries  of  the  Northeast  ?  From  the  very 
start  hand-trades  and  mechanical  pursuits,  that  must  be 
carried  on  in  the  locality  where  needed,  grew  up  beside 
agriculture.  Then  began  the  manufacture  of  coarse 
products,  such  as  coarse  cotton  goods  in  the  South,  and 
coarser  leather,  iron,  and  woolen  goods  in  the  West. 
Gradually  the  manufacture  of  coarser  products  has 
moved  from  the  East  to  the  West  and  South,  while  the 
older  states  have  had  to  devote  themselves  to  the  pro- 
duction of  finer  goods  of  all  sorts.  No  one  doubts  that 
the  West  and  South  will  gradually  develop  these  finer 
grades  of  manufacture,  as  their  population  and  capital 
increase  ;  but  meanwhile  they  have  very  wisely  devoted 
much  energy  to  agriculture  and  other  pursuits  in  which 
they  have  unparalleled  advantages.  With  its  energetic 
and  intelligent  labor  force,  with  various  and  unrivaled 
natural  advantages,  diversity  of  occupations  in  the 
United  States  was  as  sure  to  occur  as  the  subjugation  of 
our  territory  to  the  uses  of  civilization.  In  the  economic 
development  of  our  country  the  tariff  has  been  a  factor 
of  minor  importance. 

§  247.  The  limits  of  this  chapter  do  not  permit  more 
than  a  brief  treatment  of  the  fundamental  facts  and 
principles  that  underlie  the  tariff  question.    The  student 


RESTRICTION  OF  INTERNATIONAL   TRADE       373 

should  be  reminded,  however,  that  our  protective  tariff 

has  existed  for  a  long  time,  and   has  diverted  a  great 

deal   of  labor  and    capital   into  invest  incuts      „  .  „,„.„,., 
1  Our  present 

that  would  be  ruined  by  a  sudden  abolition     tariff  is  an 

.  ,  historical 

of  protective  duties.  At  least  five  per  cent  product,  and 
of  the  labor  force  of  the  country  (certainly  ^eatedM 
not  more  than  ten  per  cent)  is  now  en-  sucn- 
gaged  in  business  enterprises  which  could  not  continue 
to  exist  if  protection  should  be  removed  entirely. 
To  compel  this  portion  of  our  labor  force,  and  a  cor- 
responding amount  of  capital,  to  find  immediate  in- 
vestment elsewhere  would  cause  great  hardship  to  all 
interests.  In  most  of  the  so-called  protected  industries 
many  establishments,  perhaps  a  majority  in  such  indus- 
tries as  the  manufactures  of  cotton  and  steel,  would 
prosper  under  free  trade  ;  but  the  less  efficient  establish- 
ments would  have  to  be  closed  up.  Nevertheless,  it  is 
desirable  and  feasible  to  effect  a  gradual  withdrawal  of 
labor  and  capital  from  enterprises  that  cannot  become 
self-sustaining.1 

1  In  the  words  of  Adam  Smith,  "  the  equitable  regard  "  for  the  inter- 
est of  the  protected  industry  requires  that  changes  of  this  kind  should 
never  be  introduced  suddenly  ;  but  slowly,  gradually,  and  after  a  verv  long 
warning."  "  The  legislature  .  .  .  ought,  upon  this  very  account,  perhaps, 
to  be  particularly  careful  neither  to  establish  any  new  monopolies  of  this 
kind,  nor  to  extend  further  those  which  are  already  established.  Every 
such  regulation  introduces  some  degree  of  real  disorder  into  the  constitu- 
tion of  the  state,  which  it  will  be  difficult  afterwards  to  cure  without  oc- 
casioning another  disorder." 


374  PRINCIPLES  OF  ECONOMICS. 


LITERATURE  ON  CHAPTER  Xlly 

General  References:  Andrews,  Institutes  of  Economics, 
92-101,  113,  114,  121;  Bastable,  Theory  of  International  Trade; 
Bastable,  The  Commerce  of  Nations;  Cairnes,  Leading  Prin- 
ciples of  Political  Economy,  297-406  ;  Ely,  Outlines  of  Economics, 
280-285;  Ely,  Problems  of  To-day,  1-86;  Goschen,  Theory  of 
Foreign  Exchanges;  Hadley,  Economics,  421-445;  Macvank, 
Political  Economy,  323-363,  381-386  ;  Mill,  Principles  of  Political 
Economy,  Bk.  III.  Chaps.  17,  18,  19,  20,  21,  Bk.  V.  Chap.  10; 
Roscher,  Political  Economy,  Appendix,  II.  and  III.;  Smith, 
Wealth  of  Nations,  Bk.  IV.;  Walker,  Political  Economy,  111- 
120,  448-463,  505-517;  Nicholson,  Principles  of  Political  Econ- 
omy. IT.  235-328 ;  Clare,  The  A  B  C  of  the  Foreign  Exchanges, 
A  Money  Market  Primer. 

Special  References  on  the  Tariff  History  of  the  United 
States  :  Grosvenok,  Does  Protection  Protect?  Hill,  First 
Stages  of  the  Tariff  Policy  of  the  United  States;  Rabbeno,  Amer- 
ican Commercial  Policy ;  Statistical  Abstract  of  the  United  States, 
1896;  Sumner,  History  of  Protectionism  in  the  United  States; 
Shaw,  The  National  Revenues;  Taussig,  Tariff  History  of  the 
United  States,  Sta,te  Papers  and  Speeches  on  the  Tariff;  The 
Existing  Tariff  upon  Imports;  Young,  Report  on  Customs  Tariff 
Legislation  of  the  United  States. 

Special  References  in  Favor  of  Protection :  Bowen,  Ameri- 
can Political  Economy;  Carey,  Manual  of  Social  Science;  Gunton, 
Social  Economics,  320-361 ;  List,  National  System  of  Political 
Economy;  Patten,  Economic  Basis  of  Protection;  Roberts, 
Government  Revenue;  Thompson,  Social  Science  and  National 
Economy. 

Special  References  in  Favor  of  Free  Trade :  Bastiat, 
Sophisms  of  Protection;  Perry,  Principles  of  Political  Economy; 
Sumn  BK,  Protectionism. 

Special  References  on  the  Financial  Aspects  of  Customs 
Taxes:  Bastable,  Public  Finance,  489-509;  Ely,  Taxation, 
79-93;  Plehn,  Public  Finance,  182-207. 


DISTRIBUTION  OF    WEALTH.  Sll 


CHAPTER  XIII. 

THE   DISTRIBUTION    OF  WEALTH. 
I.    Social  Income. 

§  248.  The  wealth  of  a  society  at  any  time  consists  of 
all  its  accumulated  material  goods,  whether  more  or  less 
durable,  whether  capital  goods  or  consum-  _  . , 

r  °  Social  wealth 

able  wealth,  and  all   personal  services  that  and  social 

.  .  .  income. 

it  has  at   its   disposal.     It  is  impossible  to 
measure  and  compute  the  various  personal  services  that 
form  part  of  the  social  wealth  at  any  moment ;  so  that 
the  common  conception  of   social  wealth  is  limited  to 
the  material  possessions  of  a  community. 

The  monthly  or  animal  income  is  to  be  distinguished 
carefully  from  the  wealth  of  a  society.  The  social  income 
depends  chiefly  upon  the  use  that  is  made 
of  the  social  wealth.  It  depends  upon  the 
degree  in  which  the  natural  resources  of  a  country  and 
the  personal  faculties  of  its  inhabitants  are  utilized 
for  the  production  of  material  goods  or  personal  services  ; 
upon  the  manner  in  which  capital  is  employed  in  creating 
new  wealth ;  and  upon  the  extent  to  which  durable  con- 
sumers' goods,  the  products  of  past  industry  (for  example, 
dwelling  houses,  works  of  art,  books,  etc.),  are  made  to 
yield  the  satisfactions  that  they  have  the  power  to  confer, 


376  PRINCIPLES   OF  ECONOMICS. 

Jn  this  way  the  social  income  for  any  month  or  year  may 
be  divided  into  four  constituent  parts  :  — 

1.  The  satisfactions  derived  from  durable  consumable 
goods,  the  product  of  past  industry,  that  still  remain  in 
the  possession  of  the  community  and  add  to  its  material 
enjoyments. 

2.  The  personal  services  at  the  disposal  of  the  society 
during  the  period  for  which  the  income  is  computed. 

3.  The  material  goods  of  a  consumable  character  that 
are  the  product  of  the  current  industry  for  the  period 
considered. 

4.  The  producers'  goods,  or  capital,  created  by  the 
current  industry  of  the  period,  and  available  for  the  pro- 
duction of  economic  goods  during  following  periods. 

If  we  conceive  of  social  wealth  as  an  accumulation  or 

fund  of  economic  goods,  then  social  income  should  be 

conceived  as  a   continual   flow   of   personal 

Social  income  J  ^  r 

afiowofeco-  services,  consumable  material  wealth,  and 
nomic  g  s.  pro(jucers'  g00(js  0r  capital.  National  pros- 
perity depends  less  upon  the  amount  of  wealth  than 
upon  the  utilization  of  the  national  possessions  in  deriv- 
ing the  annual  income.  In  this  chapter  we  shall  study 
the  methods  by  which  the  social  income  is  distributed 
among  the  individuals,  or  classes  of  individuals,  that 
compose  the  society. 

§  249.  The  general  causes  that  determine  the  amount 
causes  that  of  the  social  income  have  been  discussed  in 
determine tbe  the  chapter   treating  of   the   production  of 

amount  of  the  '  v 

social  income,  wealth.  But  the  following  facts  need  to  be 
mentioned  here  :  — 


SOCIAL    IS COME.  377 

1.  Of  the  four  constituent  parts  of  social  income, 
as  enumerated  in  the  preceding  section,  the  first  is  quite, 
independent  of  the  enterprise  and  the  labor  of  society  > 
in  the  period  during  which  the  income  is  estimated, 
and  depends  upon  past  production.  The  last  three 
parts  vary  with  the  productivity  of  the  labor  of  society 
during  the  period  under  consideration,  and  depend  upon 
current  production. 

2.  Considering  now  simply  these  last  three  parts  of 
social  income,  which  are  the  output  of  current  industry, 
we  know  that  they  arc  produced  by  capitalistic  methods 
of  production.  This  is  especially  true  of  the  consumable 
material  goods  and  the  capital  goods  that  form  the  last 
two  parts  of  social  income. 

3.  The  use  of  capital  in  production  has  increased 
marvelously  during  the  last  century,  so  that  the  effi- 
ciency of  the  labor  of  any  society  depends  very  largely 
upon  the  amount  and  kind  of  capital  utilized  in  produc- 
tion. An  increase  of  the  labor  force  or  a  gain  in  the 
efficiency  and  energy  of  the  present  laborers  would  re- 
sult in  a  considerable  increase  in  the  productivity  of  the 
industries  of  any  society.  But  without  an  increase  of 
capital  there  would  be  strict  limits  to  the  increased  pro- 
ductivity caused  in  this  way.  Capital  now  performs 
such  a  large  share  of  the  work  of  production,  and  is  re- 
sponsible for  such  a  great  proportion  of  the  efficiency  of 
modern  industry,  that  the  social  income  of  consumers' 
goods  and  producers'  goods  cannot  be  increased  very 
greatly  unless  the  amount  of  capital  is  first  increased. 
In  other  words,  that  part  of  the  social  income  which  is 


378  PRINCIPLES   OF  ECONOMICS. 


* 


composed  of  the  products  of  current  industry  depends  at 
any  period  very  largely  upon  the  capital  used  in  produc- 
tion.    It  follows,  therefore,  that  the  social  income  of  the 
people  of  the  United  States  during  the  year  1896  de- 
pended   very  largely  upon   the   capital   that   had   been 
accumulated  and  applied  to  production  prior  to  that  year. 
More  labor  or  more  efficient  labor  might  have  increased^ 
the  year's  income  considerably,  but  the  product  of  our  \ 
industry  was   profoundly  dependent  upon  capital   pro- 
duced  by  the  labor  of   previous   years.  ^V 
§  250.    All   private   incomes,   whether  of   capitalists,      « 
laborers,  landowners,   or   employers    come   out   of   the 
social  income  of  the  society.     The  income  of 

Private  In-  J  I 

comes  and       one  class  may  increase  at   the  expense  of 

social  income.      ,i  ,     ,    .,     .  • ,  •,       ?        ,-, 

others  ;  but  it  is  possible  tor  the  incomes 

of  all  classes  to  increase  only  when  the  general  social 

income  is  enlarged.      In  so  far  as  the  amount  of  the 

social  income  is  dependent  upon  the  capital  employed  in 

productive  industry,  the  incomes  of  all  classes  of  society 

are  dependent  upon  the  capital  produced  by  the  industry 

of  the  past. 

II.  Private  Income. 

§  251.   The  income  of  an  individual  may  be  considered 

to  be  a  certain  portion  of  the  material  goods  or  personal 

services   that   make  up   the   social  income. 
Real  and  l 

money  In  this  sense  economists  speak  of  real   in- 

come, as  opposed  to  money  income.  The 
latter  consists  of  income  expressed  in  terms  of  money. 
This  distinction  is  important.     It  is  possible  to  increase 


PRIVATE  INCOME.  379 

money  incomes  without  increasing  real  incomes.  If  the 
currency  of  the  United  States  should  be  doubled  in  any 
year,  money  incomes  of  many  persons  might  be  increased, 
but  the  simultaneous  increase  of  prices  would  wholly  or 
partially  offset  the  increase  of  money  incomes.  Mani- 
festly an  increase  in  money  incomes  due  to  such  a  cause 
as  this  does  not  affect  the  real  income  of  the  country  in 
any  particular.  So,  in  comparing  the  money  incomes  of 
laborers  in  one  country  with  those  of  another,  it  is  neces- 
sary to  compare  the  relative  purchasing  power  of  money 
in  respect  to  those  commodities  which  the  laborer  con- 
sumes. Higher  money  wages  may  or  may  not  indicate 
higher  real  wages  and  a  greater  degree  of  prosperity  of 
the  laboring  classes. 

§  252.    Private  incomes  are  regularly  expressed  and 
measured  in  terms  of  money.     A  money  income  may  be 

considered  a  <_emand  upon  the  current  prod- 
Money  in- 

uct  or  past  accumulations  of  society  for  any  comes  further 

-,.,.  •  ,i     .    ,,  •  p    considered, 

commodities  Oi  services  that  the  receiver  of 

the  income  desires  to  purchase.  Money  incomes  are 
regularly  expended  for  the  commodities  or  services  that 
constitute  the  real  income  of  the  receiver.  Only  in  a  few 
cases  are  money  incomes  hoarded.  When  money  is  de- 
posited in  a  bank,  the  depositor  of  the  money  really  lends 
to  some  other  person  the  right  to  demand  commodities  in 
the  present,  in  return  for  the  right  to  receive  at  some 
future  time  an  equivalent  income.  Money  incomes  are 
expended  for  the  following  things  :  — 

1.    Services  or  consumable  commodities,  the  product 
of  current  industry. 


380  PRINCIPLES   OF  ECONOMICS. 

2.  Durable  consumable  goods,  the  product  of  past  in- 
dustry, as  in  the  purchase  of  a  house  or  book  produced 
in  previous  years. 

3.  Producers'  goods  or  capital,  the  product  either  of 
current  or  of  past  industry. 

§  253.   In  treating  of  the  distribution  of  the  real  income 

of  a  society  among  its  individual  members,  we  have  to 

consider   primarily   the   causes    that   affect 

The  distribu-  l  J 

tion  of  money  the  money  incomes  received  by  individuals. 
Within  any  social  group,  the  real  income 
of  one  individual  will  be  larger  or  smaller  than  the  real 
incomes  of  other  individuals  roughly  in  proportion  as  his 
money  income  is  larger  or  smaller.  Between  different 
groups  prices  may  be  so  different  that  this  will  not  hold 
true. 

III.   Primary  and  Secondary  Distribution. 

§  254.  Considering  now  the  money  incomes  received 
by  individuals,  we  must  notice  that  the  first  process 
Primary  by  which  private  money  incomes  are  deter- 
distribution.  m]ncc[  js  fae  sale  of  products  and  services 
in  the  market.  Material  goods  and  services  are  sold  for 
money,  then  the  necessary  expenses  of  production  are 
paid,  and  a  net  income  is  secured.  This  is  the  primary 
fact  in  the  distribution  of  money  incomes  among  indi- 
viduals, and  may  be  called  the  primary  process  of 
distribution. 

Suppose  a  farmer  to  own  his  land,  buildings,  live  stock, 
machinery,  and  tools.  Suppose  him  to  perform  all  the 
labor  of  carrying  on  the  farm.    Then  suppose  that  the 


PRIMARY  AND  SECONDARY  DISTRIBUTION.      381 

sales  of  the  products  from  the  farm  amount  to  $2,500 
annually,  while  the  expenses  for    purchasing  seed,  re- 
newing the   land,    repairing  buildings,    and    PrImary 
keeping  the  stock  and  implements  in  good    distribution 

'  °  illustrated 

condition,    amount     to    $1^500    each    year,    by  the  case 

Then   the  farmer  will  have  a  gross  income    °  *  armen 

of  $2,500  and  a   net  income  of  $1,000.     For  him  the 

distribution   of    wealth    means   simply  the   sale  of  his 

products  and  the  payment  of  the  expenses  of  running 

the  farm.1 

Assume  other  cases.  A  physician  may  own  all  the 
capital  used  in  his  profession.  He  gets  his  gross  in- 
come by  selling  his  services,  and  receives  a  other 
net  income  proportioned  to  the  excess  of  his  mustration». 
gross  income  over  the  expenses  of  carrying  on  his  busi- 
ness. So  with  a  shoemaker,  a  tailor,  or  a  proprietor  of 
a  small  store,  who  may  own  his  capital  and  land  and  do 
all  his  own  work. 

§  255.    Now,  if  all  production  were  carried  on  by  men 
who  owned  all  the  land  and  capital  used  in  business,  per 
formed  all  the  necessary  labor,  and  carried  on  Weed  of  a 
the  enterprises  on  their  own  responsibility,  processof 
the  distribution  of  wealth    would    comprise  distribution, 
nothing  but  the  simple  process  of  primary  distribution. 

1  Commonly  a  farmer  gets  a  part  of  his  income  by  consuming  some  of 
his  products  on  the  farm.  Here  he  receives  his  real  income  directly,  with- 
out receiving  a  money  income  that  must  be  expended  fur  the  real  income. 
Yet,  if  the  farmer  should  keep  Ids  luniks  carefully,  he  ought  to  esti- 
mate the  market  value  of  all  products  consumed  on  the  farm,  and  add 
this  sum  to  the  money  income  secured  from  the  sale  of  products  in  the 
market 


382  PRINCIPLES  OF  ECONOMICS. 

But  in  modern  business,  we  find  two  distinct  classes  of 
income  receivers :  — 

1.  Persons  who  secure  a  primary  income  from  man- 
aging business  on  their  own  responsibility,  and  selling 
products  or  services  for  more  than  the  expenses  of 
producing  them. 

2.  Persons  who  have  business  relations  with  the  re- 
ceivers of  primary  incomes.  These  persons  may  be 
laborers  who  agree  to  work  for  other  men  who  bear  the 
responsibility  of  furnishing  capital  and  of  assuming  the 
risks  of  management.  Second,  they  may  be  investors 
of  capital  who  do  not  desire  to  assume  the  risks  and 
responsibility  of  investing  in  a  business  that  they  must 
manage  for  themselves.  Such  capitalists  often  lend 
their  capital  to  active  business  men.  Third,  they  may 
be  landowners  who  own  land  which  they  do  not  desire 
to  utilize,  and  prefer  to  rent  to  men  who  do  wish  to 
use  it.  These  three  classes,  hired  laborers,  lenders  of 
capital,  and  landlords,  receive  secondary,  or  derivative, 
or  dependent  incomes  from  the  persons  who  carry  on 
industry  on  their  own  responsibility. 

§  256.    The  distribution  of  secondary  incomes  depends 

primarily  upon  the  legal   relations  that  exist  between 

Thepositionof  the  independent  employers,  the  responsible 

Insecondaxy    managers   of   business   enterprises,    on    the 

distribution.    onc    hand,   and    the   dependent    capitalists, 

landlords,  and  laborers,  on  the  other. 

An  employer,  or  a  responsible  manager  of  a  business 
enterprise,  usually  has  some  capital  of  his  own  that  he 
invests  in  the    business    undertaking.      If  he   fails   to 


PRIMARY  AND  SECONDARY  DISTRIBUTION.      383 

sell    his  products   for  more  than  the  expenses  of  pro- 
ducing them,  he  must-meet  all  expenses  con-  _ 

°  l  The  employer 

tracted,  even  if  this  has  to  be  done  out  of  his  or  responsible 
capital.  The  fate  of  the  business  depends 
upon  his  ability  ;  and,  if  he  incurs  a  loss,  he  alone  is  re- 
sponsible. In  a  common  partnership  each  member  risks 
all  his  property  for  the  debts  of  the  firm,  while  the  limited 
liability  of  the  business  corporation  limits  the  risk  of  the 
investors  to  the  amount  of  the  capital  invested  by  them. 
On  the  other  hand,  the  employer  or  manager  secures  all 
the  profit  when  the  business  is  successful. 

Capitalists  and  landowners  who  lend  capital  and  land 
to  the  active  managers  of  business  enterprises,  agree  to 
place  their  capital  and  land  at  the  disposal  of  _  ,       .    . 

i  «  r  The  dependent 

the  managers  for  a  definite  period  of  time,  capitalist 

P       .  .  P  and  landlord. 

in  return  for  interest  or  rent  paid  out  of  the 
gross  income  of  the  business.  If  the  manager  is  unable 
to  pay  interest  and  rent,  or  to  return  the  capital  when 
the  time  for  repayment  comes,  out  of  the  gross  income 
of  the  business,  then  he  must  draw  upon  his  own  capital 
for  the  necessary  sums.  The  lenders  of  land  and  capital 
avoid  much  of  the  risk  which  the  active  manager  as- 
sumes. The  lenders  can  lose  only  when  the  business 
fails  so  badly  that  the  capital  loaned,  or  interest  and 
rent  due,  cannot  be  recovered  out  of  the  assets  of  the 
enterprise.  The  capital  of  the  manager  serves  as  a  buffer 
to  protect  the  lenders  from  loss.  On  the  other  hand, 
lenders  of  capital  and  land  receive  only  fixed  payments, 
and  have  no  share  in  any  unusual  profits  that  may  come 
from  the  business. 


384  PRINCIPLES  OF  ECONOMICS. 

The  employer  must  also  pay  the  hired  laborers  the 
wages  agreed  upon,  even  if  this  has  to  be  done  out  of 
The  hired        n^s    capital.      In   many     states    the    hired 
laborer.  laborer  has  a  "  mechanics'  lien "  upon  the 

product  of  the  business,  and  is  almost  in  the  position 
of  a  preferred  creditor.  At  the  same  time  he  regularly 
has  no  share  in  the  profits  that  may  be  realized. 

§  257.  There  is  still  a  third  process  by  which  private 
incomes  are  determined.  Men  who  own  dwelling  houses, 
Tertiary  or  ^an(^  f°r  residence  sites,  or  some  other 
distribution.  duraDle  good,  may  derive  an  income  from 
renting  them  to  other  persons  in  return  for  stipulated 
payments.  Such  goods  are  not  used  in  what  is  technic- 
ally called  productive  industry.  They  are  durable  con- 
sumption-goods, for  whose  use  other  people  are  willing 
to  pay  money  to  the  owners.  The  persons  who  agree 
to  make  such  payments  may  be  independent  employers, 
or  dependent  capitalists,  landowners,  and  laborers.  In 
other  words,  the  interest  or  rent  paid  for  the  use  of 
durable  consumption-goods  may  come  out  of  either  pri- 
mary or  secondary  incomes.  The  owners  of  such  dura- 
ble consumption-goods  consider  them  to  be  a  part  of 
their  private  capital,  since  they  derive  an  income  from 
them.  In  everyday  speech,  such  goods  may  be  called 
capital.  But  the  student  must  notice  that  they  are 
private,  acquisitive  capital  merely ;  that  is,  they  are  the 
means  by  which  private  individuals  secure  a  share  of 
the  social  income.  These  durable  consumption-goods 
are  not  used  in  what  the  economist  defines  technically 
as  the  production  of  wealth. 


CLASSIFICATION  OF  PRIVATE  INCOMES.         385 

IV.    General  Classification  of  Private  Incomes. 

§  258.  From  another  point  of  view,  it  is  possible  to 
classify  private  incomes  as  follows  :  — 

1.  Incomes  received  by  responsible  man-  _   _ 

J  '  Profits,  wages, 

agers   of   business   enterprises.     These   are  interest,  and 
commonly  called  profits. 

2.  Incomes  received  by  laborers  for  their  personal  ex- 
ertion in  producing  material  goods  or  services.  These 
are  called  wages  or  salaries. 

3.  Incomes  received  by  owners  of  productive  capital 
loaned  to  managers  of  enterprises,  or  by  owners  of  dura- 
ble consumption-goods  loaned  to  other  persons.  These 
incomes  are  termed  interest. 

4.  Incomes  received  by  owners  of  land  rented  for 
business  enterprises,  or  rented  for  use  as  residence 
sites,  and  for  purposes  that  are  not  connected  with  the 
technical  process  of  wealth  production.  Such  an  income 
is  called  rent. 

§  259.    Suppose  a  manufacturer  to  own   an   acre  of 
land  and  120,000  capital.     He  invests  $20,000  in  build- 
ing and  equipping  a  factory,  of  which  sum  . 
he  borrows  $10,000  at  six  per  cent  interest,  of  these  forms 
This  will  leave  him  $10,000  of  his  own  cap- 
ital, which  he  invests  and  re-invests  in  hiring  laborers 
and  buying  materials.     Suppose  that  he  rents  an  addi- 
tional acre  of  land  for  use  in  the  business,  agreeing  to 
pay  an  annual  rental  of  $400.     Then  he  hires  twenty 
laborers  at  annual  wages  of  $600  each.     Each  year  he 
is  obliged  to  spend  $2,000  for  repairing  his  buildings 


386  PRINCIPLES   OF  ECONOMICS. 

and  keeping  his  machinery  in  good  condition ;  while  his 
taxes  and  insurance  amount  to  $600  annually,  and  mis- 
cellaneous expenses  to  $ 400  more.     In  the  course  of  the 
year  he  turns  out  a  product  for  which  he  receives  a  gross 
return  of  $30,000.    In  so  doing  he  spends  $10,000  for  raw 
materials,  etc.,  so  that  he  has  $20,000  available  for  meet- 
ing his  other  expenses.    These  expenses  are,  first,  $2,000 
for  repairs,  $600  for  insurance  and  taxes,  and  $400  for 
miscellaneous    expenses.     This    leaves    an    income   of 
$17,000    available   for   meeting    his    other    obligations. 
These  are :   $12,000  for  wages,  $600  for   interest,  and 
$400  for  rent.     After  paying  these  last  expenses  he  has 
a  gross  profit  of  $4,000  on  the  year's  business.     But  it 
is  often  customary  to  divide  these  gross  profits  into  cer- 
tain constituent  parts.     The  manufacturer  has  $20,000 
invested  in  the  business,  on  which  he  could  have  secured 
six  per  cent  interest  without  incurring  the  risks  and 
trouble   of    establishing    and    running    the    enterprise. 
Therefore  he   will  estimate  that  $1,200  of  these  gross 
profits  represents  interest  on  his  invested  capital.     Sim- 
ilarly he  owns  an  acre  of  land  which  could  have  been 
rented  for  $400.     Consequently,  he  will  estimate  that 
$400  of  the  gross  profits  represents  merely  the  rent  of 
his  land.     His  net  profits,  therefore,  due  to  his  enter- 
prise  in   establishing   the   industry    will   be   $4,000  — 
($1,200  -f-  $400)  =  $2,400.     We  shall  now  proceed  to 
consider  the  causes  that  affect  the  terms  upon  which  a 
manager  hires  laborers,  borrows  capital,  and  rents  land, 
and  the  causes  that  make  it  possible  for  him  to  derive  a 
net  profit  from  his  business. 


INTEREST.  387 

V.    Interest. 

§  260.  In  studying  the  production  of  wealth,  we  saw 
that  social,  or  productive,  capital  is  an  important  factor, 
and  we  defined  capital  as  the  produced  instru- 

Private  or 
incuts  of  indirect  production.     In  studying     acquisitive 

the  distribution  of  wealth,  we  have  seen  that  Mpi  * 
men  secure  incomes,  not  only  from  those  forms  of  pro- 
ductive capital  that  are  reduced  to  private  ownership, 
but  also  from  durable  consumers'  goods,  such  as  houses, 
etc.1  In  popular  speech,  every  possession  of  an  individ- 
ual that  is  a  means  of  securing  a  money  income  is  called 
capital.2  The  economist  needs,  therefore,  to  recognize 
that  capital  in  distribution  plays  a  different  part  from 
what  it  does  in  production.  In  distribution,  we  consider 
methods  by  which  private  individuals  acquire  incomes. 
Capita],  therefore,  must  be  viewed  as  a  means  of  private 
acquisition,  not  as  a  means  of  producing  social  wealth. 
We  define  private  or  acquisitive  capital  as  any  product 
of  human  industry  that  serves  as  a  source  of  income  to 
individuals.     It  includes  :  — 

1.  Those  forms  of  social  or  productive  capital  that 
are  subject  to  private  ownership,  and  serve  as  sources  of 
income  to  individuals.  Land  is  not  included  here,  and 
must  be  considered  separately. 

1  Carriages  rented  by  liverymen,  and  books  rented  by  a  circulating 
library,  are  otlier  examples  of  consumers'  goods,  used  as  means  of  secur- 
ing money  incomes. 

-  Even  land  is  included  in  tbe  popular  conception  of  private  capital. 
This  should  not  lie  included  by  the  economist,  however,  since  laud  is  not 
produced,  and  the  income  received  from  it  differs  from  the  income  secured 
from  other  forms  of  private  capital. 


388  PRINCIPLES  OF  ECONOMICS. 

2.  Those  durable  consumers'  goods  that  can  be 
"  rented "  to  others,  and  serve  as  sources  of  private 
income  to  their  owners. 

§  261.  Interest  is  paid,  first  of  all,  for  the  use  of  pro- 
ductive capital.  Now  such  capital  is  worthless  in  itself, 
but  is  very  valuable  when  used  in  the  pro- 

The  value  of  J  l 

productive      duction    of   economic  goods.      What  deter- 

capit  "  mines  its  value  ?     For  instance,  what  deter- 

mines the  value  of  a  machine  or  a  factory  ?  The  value 
of  capital,  like  that  of  any  other  product  of  industry,  is 
determined  'primarily  by  its  marginal  utility.  In  the 
case  of  capital,  the  marginal  utility  depends  upon  the 
utility  of  its  marginal  product.  But  if  competition  is 
free,  then  the  expenses  of  production  will  exert  an  in- 
fluence on  the  supply.  Ultimately  the  price  received 
for  a  machine,  or  any  other  form  of  productive  capital, 
will  be  such  as  equalizes  the  utility  of  the  marginal  prod- 
uct with  the  marginal  expenses  of  production.  On  the 
other  hand,  when  some  element  of  monopoly,  such  as  a 
patent  right,  prevents  competition  from  operating,  the 
price  of  the  capital  good  will  be  fixed  at  the  point  of 
highest  net  returns. 

Interest  is  also  paid  for  the  use  of  durable  con- 
sumers' goods  such  as  dwelling  houses.    The  question  of 

The  value  of    ^ne  va^uc  °f  such  goods  needs  no  further 

durable  goods,  explanation. 

§  262.   In  the    case  of   a   long-time  loan,   such   as   a 

mortgage  loan  on  real  estate  for  a  term  of  years,  or  an 

investment  in  the  bonds  of  a  corporation,  interest  is 

paid  for  the  use  of  capital.     Many  errors  spring  from  a 


INTEREST.  389 

failure  to  perceive  that  such  a  long-time  loan  is  really 
a  loan  of  productive  capital  in  the  form  of 

r  f  Short  and 

machinery  and  buildings,  and  not  a  loan  of  longtime 
money.  The  loan  may  be  made  in  money, 
but  the  money  is  immediately  invested  by  the  borrower 
in  some  form  of  productive  capital.  Money  serves 
merely  as  an  instrument  for  effecting  this  loan  of 
capital.  Such  loans,  and  the  rate  of  interest  upon 
them,  are  not  affected  by  the  amount  of  money  in  cir- 
culation, as  will  be  shown. 

Short-time  loans  are  somewhat  different.     They  are 
usually  made  by  bankers,  and  may  be  either  call  loans, 
payable  on  the  demand  of  the   lender,   or  snort-time 
thirty-,  sixty-,  and  ninety-day  loans,  which   loans  are  more 

J   '  J    ■  J         J  nearly  loans 

bankers  make  by  discounting  commercial  of  money, 
paper.  Short-time  loans  are  required  by  merchants 
who  have  contracted  debts  in  buying  raw  materials  or 
stocks  of  finished  products,  and  must  make  payment  for 
them  before  the  goods  can  be  sold  again.  Such  mer- 
chants continually  borrow  money  on  call  or  for  thirty, 
sixty,  or  ninety  days.  They  desire  immediate  means  of 
payment,  and  expect  in  a  few  weeks  to  return  the  money 
borrowed  when  they  dispose  of  their  products.  Short- 
time  loans  constitute  a  demand  for  means  of  paying- 
debts.  They  are  affected,  therefore,  by  temporary 
changes  in  the  money  market. 

§  263.  Productive  capital  is  valued  in  terms  of  money. 
When  a  man  borrows  productive  capital,  the  loan  is 
commonly  expressed  in  terms  of  money,  and  a  certain 
per  cent  of  the  principal  is  agreed  upon  as  the  rate  of 


390  PRINCIPLES   OF  ECONOMICS. 

interest.  Two  questions  must  now  be  examined  :  First, 
The  rate  of  Why  is  it  that  the  person  who  lends  pro- 
Tckhictive  ductive  capital  can  secure  this  interest  or 
capital.  premium  for  the  loan  ?  Second,  What  deter- 

mines   the   rate   of    interest  that    such   a   person   can 
secure  ? 

The  payment  of  interest  for  a  loan  of  capital  is  not 
explained  by  simply  showing  that  capital  serves  to  in- 
crease production,  to  improve  the  quality  of 
Interest  arises  r  *  L  J 

from  differ-     the   product,   and  to  secure  products   that 

ence  between  i-ii  i  j    •      i  i         ,1  •  T» 

the  vaine  of     would  be  unattainable  otherwise.     It   men 
present  and     wouid  be  willing,  without  receiving  interest, 

future  goods.  °'  05 

to  accumulate  enough  capital  to  carry  on 
the  business  of  the  world,  then  no  one  could  secure 
interest.  But  this  is  something  that  cannot  be  ex- 
pected. If  a  person  has  81,000,  he  can  expend  it  for 
consumers'  goods  that  are  available  immediately.  If 
he  invests  it  in  capital,  he  can  secure  a  return  only  after 
some  time  has  elapsed.  When  he  invests  $1,000  in 
productive  capital,  he  converts  a  present  available  in- 
come into  such  a  form  that  it  is  available  only  in  the 
future.  Now,  persons  will  not  exchange  a  present  in- 
come of  81,000  for  a  future  income  of  only  81,000. 
This  is  for  two  principal  reasons  :  First,  the  future  is 
always  more  or  less  uncertain,  and  "  a  bird  in  the  hand 
is  worth  two  in  the  bush."  Second,  even  when  the 
uncertainty  and  risk  of  the  future  are  reduced  to  a  mini- 
mum, most  persons  underestimate  or  undervalue  future 
pleasures  and  pains.  But  many  people  are  willing  to 
invest  81,000  of  income  in  capital  so  that  it  will  be  un- 


INTEREST.  391 

available  for  a  year,  in  return  for  $1,050  at  the  end  of 
that  period.  The  $50  premium  would  be  interest  in 
this  case.  It  would  be  a  premium  added  to  the  princi- 
pal of  the  loan,  available  only  at  the  end  of  the  year, 
in  order  to  make  it  equivalent  to  a  present  income  of 
$1,000.  Interest  is  paid,  therefore,  as  a  premium  to 
equalize  future  goods  or  future  income  with  present 
goods  or  income,  in  the  estimation  of  possible  investors. 
Capital  formation  implies  a  willingness  to  invest  pres- 
ent income  in  producers'  goods  that  are  available  only 
in  the  future.  Interest  is  the  inducement  necessary  to 
insure  the  formation  of  enough  capital  to  meet  the  needs 
of  business. 

Capital  may  be  furnished  by  three  classes  of  persons. 
First,  it  may  come  from  rich  persons  with  large  incomes, 
who  can  easily  save  large  amounts  of  income 

J  °  The  supply 

and  invest  them  in  capital.  Second,  it  may  of  productive 
be  supplied  by  persons  of  moderate  means  capl 
who  wish  to  provide  for  the  future,  and  would  do  so 
even  at  very  low  rates  of  interest.  Both  of  these 
classes  of  investors  do  not  require  large  premiums  in 
order  to  induce  them  to  convert  part  of  their  present 
incomes  into  capital.  In  the  third  place,  we  have  mar- 
ginal investors,  who  will  furnish  more  or  less  capital 
according  to  the  inducements  offered  for  its  investment. 
These  may  be  wealthy  persons,  or  may  be  people  of 
moderate  means,  who  would  save  and  invest  a  portion 
of  their  incomes  even  at  low  rates  of  interest.  But 
they  will  save  more,  and  furnish  more  capital,  if  the 
premium  offered  for  investments  is  high. 


392  PRINCIPLES   OF  ECONOMICS. 

The  demand   for  productive   capital  comes  from  all 

the  industries  that  are  needed  to  meet   the  wants   of 

the  society.     The  demand  will  be  large  in 
The  demand 
for  productive  proportion  to  the  energy  and  enterprise  of 

capital.  ^e  p0pUiation  m  an  branches  of  economic 

activity.  In  the  second  place,  the  demand  will  be  stim- 
ulated by  the  natural  opportunities  offered  for  favorable 
investments.  Both  of  these  causes  have  made  the  de- 
mand for  capital  very  active  in  the  United  States. 

The   rate   of   interest   is   really   the   rate   of   annual 
income  that  will  equalize  future    income  with    present 
Tnerateof      in  the  minds  of  those  persons  who  furnish 
in^res^on       the  marginal  portion  of  the  supply  of  capital 
capital.  needed  to  meet  the  demands  of  the  business 

of  a  society.  In  other  words,  we  have  merely  another 
case  of  the  equalization  of  the  supply  and  the  demand 
through  changes  in  price,  —  in  this  case  "  price"  meaning 
the  premium  offered  for  future  goods  or  income.  Prices 
of  commodities  must  be  high  enough  to  enable  the  mar- 
ginal investors  of  capital  to  secure  a  premium,  a  rate  of 
interest,  that  will  induce  them  to  furnish  the  amount  of 
capital  required. 

The  demand  for  capital  comes  from  business  men,  the 
Tneequaiiza-  managers  of  industrial  enterprises.  They 
an°ddemandly  usually  invest  considerable  capital  of  their 
accomplished   0wn,  and   desire  to   invest   more  when  the 

in  the  loan 

market.  prices  of  their  products  are  such  as  to  make 

it  profitable  to  put  more  capital  into  their  businesses. 
Therefore  they  desire  to  secure  loans  from  persons  who 
have  surplus  incomes  to  invest,  but  who  do  not  desire 


INTEREST.  393 

to  enter  into  active  business  life.  In  an  advanced  stage 
of  economic  development,  a  large  number  of  investors, 
having  no  active  part  in  business,  and  a  large  number 
of  active  managers  of  enterprises,  form  the  market  for 
loans. 

1.  The  demand  for  loans  varies.  Business  men  de- 
sire to  borrow  when  they  calculate  that  they  can  secure 
from  additional  investments  of  capital  enough  to  pay 
the  required  rate  of  interest,  and  to  leave  some  profit 
besides.  When  business  is  active,  and  the  probable 
profits  of  business  are  high,  more  business  managers 
will  desire  to  borrow.  On  the  other  hand,  a  higher  rate 
of  interest  tends  to  discourage  borrowing. 

2.  The  supply  of  loans  comes  partly  from  persons  or 
institutions  that  are  unwilling  to  engage  in  active  busi- 
ness, or  incapacitated  from  doing  so.  Retired  business 
men,  managers  of  trust  funds,  banking  houses,  univer- 
sities, and  similar  institutions  belong  to  this  class  of 
investors.  The  supply  of  capital  furnished  from  such 
sources  does  not  vary  quickly  as  the  rate  of  interest  on 
loans  increases  or  decreases.  In  the  second  place,  loan- 
able capital  is  furnished  by  people  who  might  engage  in 
active  business  if  the  rate  of  interest  should  become  so 
low  as  to  leave  large  profits  to  active  managers  of  indus- 
trial enterprises.  The  supply  of  capital  secured  from 
such  persons  varies  rapidly  as  the  rate  of  interest 
changes.  The  combined  supplies  of  loanable  capital 
secured  from  these  two  sources  show,  on  the  whole,  a 
tendency  to  vary  directly  as  the  rate  of  interest  seemed 
from  loans. 


394  PRINCIPLES   OF  ECONOMICS. 

3.  The  competition  of  borrowers  and  lenders  in  the 
loan  market  is  the  efficient  force  that  determines  the 
current  rate  of  interest.  Capital  owned  and  invested 
by  active  business  managers  does  not  come  into  the  loan 
market,  but  it  exercises  an  influence  upon  the  competi- 
tion for  loans  that  takes  place  there.  If  managers  have 
a  large  amount  of  capital  of  their  own,  the  demand  for 
loans  is  less  ;  while  a  smaller  amount  in  the  ownership 
of  managers  increases  their  demands  in  the  loan  market. 
Thus  the  rate  of  interest  that  equalizes  future  income 
with  present  is  determined  primarily  in  the  market 
for  loans. 

When  loans  of  productive  capital  become   common, 

and  a  market  rate  of  interest  is  established,  then  all 

interest  may    capital  invested  in  productive  enterprises  is 

be  computed     considered  to  be  earning  interest,  whether 

on  aU  produc-  ° 

tive  capital,  such  capital  is  owned  by  the  manager  of 
the  business  or  is  borrowed  from  other  persons.  Thus 
an  employer  who  has  120,000  of  his  own  capital  invested 
in  his  business  may  not  estimate  that  he  has  made  any 
net  profits  until  he  has  charged  $1,200  of  his  income 
to  the  account  of  interest  on  his  capital  at  the  market 
rate,  say  six  per  cent. 

So  far,  we  have  assumed  that  the  risk  attending  the 
Risk  as  a  investment  of  capital  is  the  same  in  all 
factor  in         cases.     But  (his  is  far  from  true.    Of  course, 

determining 

interest.  a  certain  element  of  risk  attends  nearly  all 
exchanges  of  present  for  future  incomes.  A  business 
manager  may  lose  all  the  capital  that  he  invests,  and 
may   lose    that    which    he    borrows.     Again,    borrowers 


INTEREST.  3(Ji> 

may  prove  dishonest,  and  may  defraud  the  lenders, 
sometimes  in  spite  of  legal  restrictions.  But  these 
risks  are  not  the  same  in  all  investments,  and  there- 
fore the  rate  of  interest  varies.  Manifestly  a  larger 
premium  is  necessary  to  equalize  future  income  with 
present  when  there  is  a  risk  that  the  promised  future 
income  may  never  be  secured.  An  unusually  high  rate 
of  interest  regularly  points  to  an  unusual  risk. 

In  progressive  countries  the  rate  of  interest  tends  to 
decline.    For  this  the  following  reasons  may  be  assigned  : 
In  such  countries  an  increasing  number  of    Tendency  of 
people  possess  capital,  and  are  unwilling  or    ^!rat!f 
unable  to  engage  in  active  business.     The    decline, 
supply  of  loanable  capital  is  greatly  increased,  and  the 
interest  rate  that  equalizes  demand  and   supply  is  low- 
ered.    In  the  second  place,  business  becomes  less  specu- 
lative as  a  country  develops,  and    the    risk    attending 
investments  is  lessened.     Finally,  in  such  countries  the 
laws  do  more  to  facilitate  the  prompt  payment  or  collec- 
tion  of    debts,  thereby  further   diminishing    risks    and 
tending  to  lower  the  rate  of  interest. 

§  264.    The  case  of  loans  of  durable  consumers'  goods 
requires  little  special  explanation.    A  person    interest  on 
who  invests  15,000  in  a  house  that  he  rents    durable    , 

consumers' 

to  another  person  for  a  year  is  exchanging    goods. 

a  present  income  of  §5,000  for  a  future  sum  of  $5,000,] 

1  This  assumes  that  allowance  is  made  for  repairs  and  for  the  depre- 
ciation in  the  vain;'  of  the  house.  The  so-called  "rent,"  of  a  dwelling 
house  includes  repairs  and  depreciation,  so  that  the  owner  of  the  prop- 
erty may  receive  back  the  original  value  of  the  house  with  interest  at  the 

current  rate. 


396  PRINCIPLES   OF  ECONOMICS. 

plus  an  annual  interest  of  $300.  He  exchanges  $5,000 
of  present  goods  for  $5,300  of  goods  available  a  year 
hence.  The  rate  of  interest  on  such  loans  is  deter- 
mined by  the  laws  of  demand  and  supply. 

§  265.   Short-time  loans  command  interest  for  the  same 

reasons  as  loans  of  productive  capital  for  a  longer  period. 

But  the  rate  of  interest  is  generally  higher 

interest  on       on  short-time  loans.     This  is  because  capital 

short-time       jen^.  for  s]lor£  periods  of  one,  two,  or  three 

loans.  r 

months  must  be  continually  re-invested,  and 
may  lie  idle  for  a  part  of  the  time.  The  rate  of  interest 
on  short-time  loans  fluctuates  with  changes  in  the  money 
market.  If  money  becomes  "  tight,"  banks  find  that 
their  reserves  diminish,  and  they  are  obliged  to  contract 
their  loans  and  discounts.  This  can  be  done  by  raising 
the  interest  on  short-time  loans.  When  the  stringency 
is  over,  the  banks  find  that  their  reserves  increase,  and 
they  extend  their  discounts  in  order  to  utilize  their 
resources  as  far  as  possible.  Discounts  can  be  increased 
by  offering  them  at  lower  rates  of  interest.  The  margin 
of  fluctuation  is  very  great  in  the  case  of  these  short 
loans.  On  October  29,  1896,  the  rate  of  interest  on  call 
loans  in  New  York  was  ten  per  cent  at  the  opening  of 
the  day's  business.  By  noon  it  had  risen  to  fifty  per 
cent  annual  interest,  and  before  night  rose  to  eighty  and 
one  hundred  per  cent.  On  the  other  hand,  money  on 
call  may  occasionally  be  in  little  demand  at  one  or  two 
per  cent. 

§  266.   For  some  purposes  it  is  useful  to  speak  of  a 
general  loan  market,  in  which  loans  of  productive  cap- 


INTEREST.  397 

ital  for  permanent  investments  or  for  short  periods  of 

time,  and  loans  of  durable  consumers'  goods      The  loan 

are    offered   and    demanded.      Unquestion-     market. 

ably  there  is  a  connection  between  the  three.      If  the 

normal  rate  of  return  on  one  kind  of  loans  exceeds  the 

return  on  others,  the  supply  of  capital  offered  for  that 

purpose  will  increase,  and  the  rate  will  fall  to  the  general 

level.     This  may  be  a  gradual  process,  however.     If  the 

rates  secured  by  banks  on  their  short-time   loans  are 

unusually  high,  the  profits  of  bankers  will  be  larger,  and 

more  capital  will  flow  into  the  banking  business  sooner 

or  later.1 

§  267.    It  is  an  old  fallacy  that  an  increase  in  the 

supply   of   money   lowers    the    interest   on    permanent 

investments,    while    a   decreased    supply  of  The  rate  of 

money  raises  the   rate.     This  may  be  true   ^manent 

temporarily  of  short-time  loans,  but  is  false  investments 

.  is  not  affected 

when    applied    to   more    permanent    invest-  by  the  supply 

ments.  The  demand  for  loans  means  a  ofmoney- 
demand  for  various  other  forms  of  productive  capital, 
not  a  demand  for  money.  So,  too,  the  supply  of  loans  is 
a  supply  of  loanable  capital,  not  a  supply  of  money.  If 
the  amount  of  money  is  increased  and  prices  are  raised, 
there  will  be  an  increase  in  the  money  value  of  the  sup- 
ply of  capital  goods,  but  the  money  expression  of  the 

1  In  the  general  loan  market  two  other  kinds  of  loans  might  he  men- 
tioned. First,  a  few  people,  either  from  imprudence  or  from  misfortune, 
horrow  funds  to  relieve  personal  necessities.  But  such  loans  are  insigni- 
ficant in  amount  when  compared  with  the  general  mass  of  loans.  Second, 
governments  borrow  large  amounts  for  public  purposes.  The  demand  of 
a  government  for  loans  iu  war  times  may  greatly  raise  rates  of  interest. 


398  PRINCIPLES   OF  ECONOMICS. 

demand  for  capital  will  be  increased  also  ;  and  the  con- 
ditions of  demand  and  supply  will  be  unaltered.  If  it 
costs  twice  as  much  to  establish  productive  enterprises 
when  the  prices  of  products  are  doubled,  then  the  money 
value  of  the  capital  needed  to  build  a  factory  will  in- 
crease, and  the  money  demand  for  capital  will  increase 
proportionately  to  the  increased  supply  of  money. 

§  268.    From   antiquity   until   comparatively    modern 
times  the  justice  of  interest-taking  was  attacked  by  phi- 
losophers, statesmen,  and  theologians.    Dur- 

The  justifica-  l  '  '  ° 

tien  of  interest-  ing  the  Middle  Ages  both  the  Roman  Church 
and  the  civil  authorities  of  Europe  prohibited 
the  practice.  This  opposition  to  interest,  for  the  most 
part,  rested  r,pon  the  assumptions  that  a  loan  was  a  loan 
of  money,  and  that  money  was  sterile  and  unable  to  pro- 
duce more  money.  For  this  reason  interest-taking  was 
viewed  as  robbery.  In  modern  times,  however,  it  has 
*\  been  seen  that  most  loans  are  loans  of  productive  cap- 
ital, and  that  producers  need  a  large  supply  of  loanable 
capital.  Three  centuries  ago,  the  growing  need  of  the 
business  world  for  capita]  broke  down  the  mediaeval 
prohibition  of  interest.  It  is  the  present  social  impor- 
tance of  a  large  supply  of  capital  that  has  led  modern 
peoples  to  justify  interest-taking. 

At  the  present  time  usury  laws  are  quite  common. 
Most  of  our  states  attempt  to  fix  a  maximum  rate  of 
interest.     Such  laws  declare  the  exaction  of  more  than 
a  certain  rate  of  interest  to  be  usury  ;  they 
make  such  contracts  void  at  law ;  and  some- 
times inflict  penalties  for  charging  usurious  interest.     It 


RENT.  399 

has  been  found  that  the  commercial  world  manages  to 
evade  these  usury  laws  in  one  way  or  another,  so  that 
they  are  practically  inoperative  in  the  general  loan  mar- 
ket. When  applied  to  commercial  transactions  these  laws 
are  beyond  question  unwise.  On  the  other  hand,  our  usury 
laws  have  helped  poor  people  who  sometimes  borrow  to 
meet  personal  necessities  to  keep  out  of  the  hands  of 
money  sharks,  who  make  a  practice  of  victimizing  such 
ignorant  or  helpless  borrowers.  It  would  be  wise  to 
remove  such  restrictions  from  the  loan  market,  and  to 
leave  the  rate  of  interest  to  be  determined  by  the  forces 
of  supply  and  demand  in  the  commercial  world.  A  high 
rate  of  interest  tends  to  remedy  itself  by  attracting  an 
increased  supply  of  capital.  On  the  other  hand,  the 
interests  of  the  poor  who  may  have  to  borrow  to  re- 
lieve their  personal  necessities  may  be  safeguarded  by 
leaving  to  the  courts  the  work  of  deciding  when  interest 
contracts  are  usurious,  and  ought  not  to  be  enforced. 

VI.    Rent. 

§  269.  Rent,  in  the  economic  use  of  the  word,  is  the 
return  that  is  secured  by  the  owner  of  any  natural  agent. 
The  most  common  case  is  the  rent  secured  The  nature 
from  land,  but  the  rent  of  water  privileges,  of  rent- 
dock  facilities,  etc.,  is  an  income  of  the  same  sort. 
Natural  agents  are  reduced  to  private  ownership  when 
they  become  scarce  relatively  to  the  demand  for  them. 
Land  became  private  property  only  when  nomadic  peo- 
ples settled  down  to  agricultural  life,  and  arable  land 
became  scarce. 


400  PRINCIPLES   OF  ECONOMICS. 

§  270.    Natural  agents  are  used   in   production    and 

serve  to  satisfy  human  wants.     Thus  far  they  resemble 

capital.    But  they  differ  from  capital  in  that 

natural  they  are  not  produced,  and  their  supply  is 

Agents. 

fixed  by    nature.      They   become   economic 

goods  only  when  the  demand  for  them  increases  so  as 
to  make  them  scarce,  instead  of  free  goods.  What 
determines  the  value  of  natural  agents  that  become  rela- 
tively scarce  ?  Manifestly  their  value  depends  upon 
their  scarcit}',  and  is  not  affected  by  expenses  of  pro- 
duction. The  owner  of  a  scarce  natural  agent,  such  as 
a  piece  of  land,  can  secure  from  it  an  annual  income,  or 
rent,  say  of  $600.  Then,  if  the  market  rate  of  interest 
on  capital  happens  to  be  six  per  cent,  the  value  of  the 
piece  of  land  will  be  such  a  principal  sum  as  will  yield 
$600  annually  with  interest  at  the  current  rate.  In  this 
case  the  land  would  be  worth  $10,000.  Now  it  is  neces- 
sary to  explain  the  causes  that  determine  the  annual 
income  or  rent  obtainable  from  land. 

But  first  it  is  necessary  to  explain  that  improvements 
upon  land  or  upon  any  natural  agent  are  capital,  and 

improvements    liave  a  valuc  proportioned  to  their  marginal 
upon  land  or      expenses  of  production.     Land  is  in  itself  a 

upon  other 

natural  agents  natural  agent,  but  fences,  ditches,  dikes, 
are  capit  .  waHs>  an(i  fertilizers  are  capital  ;  and  are 
\  alued  according  to  the  expenses  of  producing  them. 
A  wnler  power  is  a  natural  agent,  but  a  dam  and  a 
canal  constructed  for  the  purpose  of  utilizing  the  power 
are  capital.  A  piece  of  land  or  a  water  power,  upon 
which  no  labor  and  capital  have  ever  been  expended, 


i;/:\r.  401 

may  be  leased  or  sold  at  prices  that  depend  solely  upon 

scarcity. 

§  271.    The  income  received  from  natural  agents  may 

be  explained  by  considering  its  most  common  form,  the 

rent  of  land.     Such  rent  arises  out  of  dif- 

The  income 

ferences  in  the  desirability  of  various  tracts  from  natural 
of  land,  due  to  differences  in  location  or  in 
natural  fertility.  For  agricultural  purposes  the  natural 
fertility  of  land  is  important.  Nature  does  much  more 
to  make  some  lands  fertile  than  it  does  for  others. 
Temperature  and  rainfall  favor  some  lands.  Some 
soils  are  far  stronger  than  others,  and  can  be  used 
continually  without  deteriorating  in  the  same  degree. 
A  plain  has  certain  advantages  over  the  slopes  of  a 
mountain,  and  land  with  a  southern  exposure  is  superior 
to  land  that  slopes  to  the  north.  When  land  is  once 
brought  into  cultivation,  then  the  condition  of  the  soil 
depends  also  upon  the  methods  employed  to  preserve  its 
fertility  ;  but  natural  differences  still  remain  very  im- 
portant. The  location  of  a  tract  of  land  is  important 
in  determining  its  desirability  for  any  purpose  whatever. 
Agricultural  land  must  be  accessible  to  the  market,  and 
the  rent  secured  from  it  will  depend  partly  upon  this 
consideration.  Land  used  for  residence  purposes  will 
be  more  or  less  desirable  according  to  its  accessibility, 
its  healthful ness,  and  the  beauty  of  its  surroundings. 
Land  used  for  the  location  of  manufacturing  or  com- 
mercial enterprises  must,  above  all,  be  accessible  to  the 
market,  to  means  of  transportation,  and  to  the  labor 
supply. 


402  PRINCIPLES   OF  ECONOMICS. 

§  272.  The  causes  that  determine  rent  can  be  illus- 
trated well  by  studying  the  rent  from  agricultural  lands. 

In  new  countries  land  is  sometimes  super- 
The  rent  of  l 

agricultural  abundant.  The  settlers  occupy  first  those 
sites  which  offer  the  best  immediate  advan- 
tages either  for  defense  or  for  securing  a  quick  return 
from  the  soil.  Produce  is  raised  from  the  land  with 
little  expenditure  of  capital  and  labor.  Suppose  that 
the  average  investment  on  each  acre  of  wheat  land  is 
five  dollars,1  and  that  the  average  return  per  acre  is 
fifteen  bushels  of  wheat.  Now  suppose  that  population 
grows  and  that  the  demand  for  wheat  increases  so  that 
the  price  rises.  How  will  this  increased  demand  be 
met  ?  Wheat-raisers  can  either  invest  more  capital  on 
the  land  already  cultivated,  and  secure  a  larger  aggre- 
gate but  a  smaller  proportional  return ;  or  they  can 
apply  the  additional  labor  and  capital  to  new  lands, 
which  may  not  be  as  fertile  as  the  old,  but  may  give  as 
large  returns  as  could  be  secured  by  additional  invest- 
ments on  the  land  formerly  cultivated.  Suppose  that, 
by  investing  five  dollars  more  on  the  old  lands,  the  yield 
could  be  increased  to  twenty-five  bushels,  while  the  new 
investments  on  the  poorer  lands  would  have  yielded  ten 
bushels.  Then  producers  would  with  equal  profit  invest 
the  additional  five  dollars  on  old  land  or  on  new  but 
poorer  land.  If,  however,  the  additional  investment 
would   have   increased   the  yield   of  the   old   lands   to 

1  We  will  suppose  that  this  covers  not  only  all  expenses  for  labor  and 
materials,  hut  also  the  expenses  for  interest  on  capital,  so  that  it  will  leavo 
the  producer  both  interest  mi  liis  capital  ami  lair  wages  for  his  work. 


RENT.  403 

only  twenty-four   bushels,  then   producers  would    have 

preferred  to  take  the  poorer  lands  into  cultivation. 

Now,  as  soon  as  the  demand  for  wheat  had  increased 

so  that  the  investment  of  five  dollars  per  acre  on  the 

most  available  lands    could    not   satisfy   it,     Diminishing 

returns  in- 
crease the 


prices  would  rise.    This  would  continue  until 


prices  became  high  enough  to  make  it  prof-    marginal 

*  °  x  expenses  of 

itable  to  invest  more  labor  and  capital,  say  production, 
five  dollars  more  per  acre,  either  upon  the  old  lands,  sub- 
ject to  a  diminishing  return,  or  upon  new  and  poorer 
lands.  The  increased  supply  would  be  produced  at  an 
increased  marginal  expense,  and  prices  must  rise  high 
enough  to  cover  this  expense,  if  the  demand  is  to  be 
satisfied.  The  former  expense  of  raising  wheat  was 
five  dollars  for  fifteen  bushels,  or  thirty-three  cents  per 
bushel.  The  increased  supply  of  ten  bushels  per  acre 
required  an  increased  outlay  of  five  dollars,  whether 
raised  on  old  lands  by  more  intensive  cultivation  or  on 
new  lands.  The  marginal  expense  of  raising  wheat  has 
risen  therefore  to  fifty  cents  per  bushel,  and  prices  must 
rise  to  that  point  before  the  supply  will  be  increased. 

When  increasing  demand  forces  up  the  price  of  wheat 
and  enables  an  increased  supply  to  be  furnished  at  a 
greater  marginal  expense,  rent  will  appear.  In  the  case 
just  assumed,  the  producer  of  wheat  on  the  older  and 
better  land  can  now  invest  five  dollars  per  acre,  pro- 
duce fifteen  bushels  worth  fifty  cents  per  bushel,  and 
can  secure  a  surplus  of  two  dollars  and  a  half.  Or  he 
can  invest  ten  dollars  per  acre,  produce  twenty-five 
bushels  worth  fifty  cents  a  bushel,  and  can  secure  a  sur- 


404  PRINCIPLES   OF  ECONOMICS. 

plus  of  two   dollars   and    a  half.      On  the  other  hand, 

before  the  increasing  demand  raised  the  price  of  wheat 

Rentisasur-  from  thirty-three  to  fifty  cents,  such  a  wheat 

plus  secured     rajser   invested   five  dollars  per    acre,   pro- 

on  more  *  '    * 

productive       duced  fifteen   bushels  worth    only  five   dol- 

investments 

of  capital  lars,  and  secured  only  enough  to  cover  his 
and  labor.  expenses.  But  the  rise  in  the  price  of  wheat 
may  have  led  some  producers  to  resort  to  poorer  lands, 
investing  five  dollars  per  acre  and  securing  ten  bushels 
of  wheat  worth  five  dollars.  Such  producers  receive  no 
surplus,  and  could  pay  no  rent  for  their  lands.  Now, 
the  owners  of  the  better  lands  can  secure  the  surplus  of 
two  dollars  and  a  half  that  is  received  from  those  lands 
as  soon  as  wheat  rises  to  fifty  cents  per  bushel.  This 
surplus  is  economic  rent. 

In  the  case  just  assumed,  the  second  investment  of 

five  dollars   per  acre,  either  upon   the  old  and  better 

Economic         land  or  npon  the  new  and  poorer,  yielded 

rent  is  a  surplus  of  income  over  expense.     A  rent 

differential  l  L 

return  secured  Was    secured    from    the    more    productive 

moreproduc-  investments  of  labor  and  capital  which 
menteupon  yielded  a  surplus.  Rents  are  measured 
land.  always  in  this  way,  and  are  a  differential 

return  secured  from  investments  that  arc  more  produc- 
tive than  the  marginal  investments  that  receive  only 
enough  to  just  pay  for  making  them.  These  marginal 
investments  may  be  made  on  new  and  poorer  land,  in 
which  case  rent  is  measured  by  the  superiority  of  ihe 
better  land  over  the  poorer.  On  the  other  hand,  the 
marginal  investments  may  be  made  on  the  older  lands 


RENT.  405 

because  they  will  secure  there  a  larger  return  than 
could  be  gained  from  poorer  lauds.  In  the  first  case 
economists  speak  of  an  extensive  margin  of  cultivation, 
that  is,  an  investment  on  the  marginal  lands  from  which 
producers  secure  just  enough  to  cover  their  expenses. 
In  the  second  case,  there  is  an  intensive  margin  of  cul- 
tivation, that  is,  a  more  complete  but  more  expensive 
utilization  of  old  lands,  which  is  made  possible  by 
increased  prices. 

In  a  new  country  settlers  are  seldom  able  to  cultivate 
the  richest  soils  first.     They  select  those  that  promise 
the    largest    immediate    return.      As    time    The0penillg 
goes  on,  richer  soils  may  be  utilized.     The    up  of  new 

lands  may 

result  is  to  increase  the  supply  of  produce,    throw  less 

,      i  .  i   .      ,,  ,       p         ■>,.  fertile  soils 

to  lower  prices,  and  to  throw  out  ot  cultiva-  outof 
tion  the  poorest  lands  that  formerly  were  in  cultivation- 
use.  The  demand  may  be  satisfied,  under  such  circum- 
stances, by  a  less  intensive  investment  of  labor  and 
capital  upon  better  soils,  and  by  a  less  extensive  invest- 
ment upon  poorer  soils.  Such  a  change  in  methods  of 
production  will  decrease  the  difference  between  the 
marginal  investments  and  the  more  productive  invest- 
ments of  labor  and  capital.  This  will  lower  the  surplus, 
or  rent,  secured  on  the  superior  investments. 

§  273.  Land  utilized  in  manufacturing  or  commercial 
enterprises  is  valued  according  to  its  location,  both  in 
respect   to   the   market  and  to  the  labor  supply.1     In- 

1  Of  course  location  is  an  important  element  in  determining  the  desira- 
bility of  agricultural  land.  Proximity  to  the  market,  or  to  railroads;  and 
canals,  decreases  the  cost  of  placing  wheat  in  the  market. 


406  PRINCIPLES  OF  ECONOMICS. 

creasing  demand  for  products  will  raise  prices  so  that 

producers  will  push  their  marginal  investments  on  to 

t  a       more  distant  and  less  desirable  lands,  or  will 
The  rent  of 

landusedfor     invest  more  intensively  upon  land   already 

other  purposes.  .    ■■        -,  . .  . .  , 

occupied,  fcometimes  there  may  be  no  act- 
ual increase  of  price,  but  rather  a  failure  of  prices  to 
fall  as  fast  as  they  might  otherwise.  The  principles 
governing  the  rents  of  such  lands  are  the  same  as  those 
that  determine  agricultural  rents. 

§  274.  Rents  do  not  raise  prices,  but  are  caused  by 
high  prices.     The  prices  of  freely  produced  commodi- 

_    .,  ties  tend  to   approximate  the  marginal  ex- 

Rent  is  not  a  l 1  ° 

cause  of  nigh  penses  of  production.  Now,  in  the  cases 
assumed,  rent  did  not  appear  until  increas- 
ing demand  had  raised  the  price  of  wheat  and  made  it 
possible  to  invest  five  dollars  additional,  for  which  an 
additional  return  of  only  ten  bushels  was  secured  either 
upon  the  old  lands  or  upon  the  new  and  poorer  lands. 
Therefore  the  rent  of  two  dollars  and  a  half  per  acre 
was  a  surplus  caused  by  the  rise  of  prices,  and  not  a 
cause  of  high  prices.  If  the  landlord  should  have 
charged  no  rent,  prices  would  not  have  fallen  below  the 
marginal  expenses  of  producing  the  increased  supply ; 
and  the  profits  of  the  farmers  on  the  better  lands  would 
have  been  increased  without  any  possibility  of  a  change 
of  prices.  The  enormous  rents  paid  for  land  in  the 
business  center  of  a  large  city  are  due  to  the  exceptional 
facilities  offered  by  such  tracts  for  doing  a  large  busi- 
ness, by  investing  large  amounts  of  capital  that  secure 
surplus  profits  before  the  marginal  investment  is  made, 


RENT.  407 

say  the  last  story  of  the  building,  at  which  point  the 
returns  received  only  just  pay  for  the  expense  of  mak- 
ing the  outlay.  Demand  for  products  and  services 
forces  prices  up  so  that  the  supply  can  be  increased  by 
more  intensive  investment  on  city  lands,  or  more  exten- 
sive investment  in  the  suburbs.  Economic  rent  is  a 
result  of  this  more  intensive  or  more  extensive  invest- 
ment, and  not  a  cause  of  higher  prices. 

Of  course  this  applies  solely  to  economic  rent,  not  to 
the  so-called  rent  of  buildings  and  improvements,  which 
is  really  interest  on  capital.     Sometimes  it 

J  r  limitations 

is  said  that  "  rent  does  not  enter  into  prices."  upon  this 
Such  a  statement  means  merely  that  rent  is 
not  a  cause  of  higher  prices.  Manifestly,  part  of  the 
price  secured  from  more  productive  investments  goes  to 
pay  rents.  The  statement  that  rent  is  an  effect,  not  a 
cause,  of  high  prices  needs  one  important  qualification. 
Land  will  normally  be  rented  for  such  purposes  as  will 
enable  the  tenant  to  pay  the  highest  rental  possible.  It 
may  happen  that  lands  otherwise  available  for  use  in 
one  branch  of  business  may  yield  a  higher  rent  when 
used  for  some  other  purpose.  When  this  happens,  the 
supply  of  the  product  of  the  first  industry  can  be  in- 
creased only  by  applying  capital  more  intensively  upon 
lands  formerly  used  or  by  resorting  to  newer  and  poorer 
lands.  Under  sueh  circumstances  the  marginal  ex- 
penses of  producing  that  product  would  be  greater  than 
they  would  have  been  if  it  had  been  practicable  to  invest 
capital  upon  the  land  that  yielded  a  higher  rent  when 
utilized  in  some  other  industry.     Of  course  this  means 


408  PRINCIPLES   OF  ECONOMICS. 

that  prices  must  rise  higher  than  would  have  been  neces* 
sary  otherwise  before  the  supply  can  be  increased. 
These  higher  prices  will  be  the  result  of  the  impossi- 
bility of  utilizing  the  land  rented  for  other  purposes. 
In  the  rents  of  desirable  city  lots  this  is  a  very  impor- 
tant consideration.  Probably  no  land  available  for 
wholesale  business,  for  instance,  would  fail  to  bear  some 
rent  when  used  for  other  purposes.  And  this  necessi- 
tates more  intensive  investment  of  capital  upon  the 
land  actually  utilized  by  wholesale  dealers,  in  order  to 
supply  a  given  demand.1 

§  275.    Moreover,  actual  rents  differ  sometimes  from 

true  economic  rents.     This  economic  law  of  rent  pre- 

Actuai  rent       supposes  competition.  It  assumes  that  aland- 

frequenuy  dif-  iov&  win  eject  a  tenant  the  moment  that  he 

fers  from  the 

true  economic  finds  another  who  can  pay  more  rent,  and 
that  tenants  will  give  up  their  locations  the 
moment  the  rent  rises  above  the  true  economic  rent. 
These  conditions  are  only  partially  fulfilled,  as  compe- 
tition is  often  imperfect.  Landlords  often  do  not  exact 
full  competitive  rents  from  old  tenants.  Farmers  who 
cultivate  land  for  subsistence  may  be  forced  to  pay 
more  than  full  economic  rents,  since  they  may  bo  more 
likely  to  accept  the  heavier  burden  than  to  look  around 
for  other  land.  On  the  other  hand,  competition  is  much 
more  active  among  business  men,  and  tends  to  make 
actual  rentals  approximate  the  true  economic  rents 
throughout  the   commercial  world. 

§  276.    It  has  been  claimed  that  the  tendency  of  eco- 

1  See  Marshall,  Principles  of  Economics,  478-485. 


RENT.  409 

nomic  progress  is  to  cause  a  decided  increase  in  rents. 
In  agriculture,  it  is  said,  the  law  of  diminishing  returns 
drives    producers    constantly    to    cultivate    The  alleged 
poorer  lands.    This  increases  the  differential    rentsTcT  °f 
rents  secured    from  better   lands.      In    the    increase, 
case  of  town  lots,  it   is  urged   that   every  increase   of 
population  raises  rentals  in  a  marked  manner.     All  such 
increases  of  rents,  it  is  thought,  are  due  solely   to  the 
growth  of  society,  not  to  the  activity  of  the  particular 
landowners  whose  rentals  are  raised.      Hence  the  ex- 
pression "  the  unearned  increment "  has  been  applied  to 
this  growth  of  rent  produced  by  social  development. 

Those  who  speak   of   the  unearned  increment   com- 
monly overlook  the  losses  that  many  landowners  suffer. 
Large  sums  spent   in  developing  city  real  Losses  of  land- 
estate  have  been  entirely  lost,  as  the  enter-   ow^,rsarL 

J  '  usuaUy  over- 

prises  have  often  proved  failures.     Changes  looked. 

in  the  location  of  street  railways  or  in  the  movement  of 

fashion  or  business  from  one  section  to  another,  lower 

rents  in  some  sections  of  a  city  nearly  as  much  as  they 

increase  them  in  another.     The  development  of  facilities 

for  rapid  transit  tends  to  decrease  the  demand  for  city 

lots  for  residence  purposes.     In  the  case  of  agricultural 

lands,  rents  have  been   lowered   repeatedly   over  large 

sections   of   country.      In    England,    agricultural    rents 

have  been  lowered  greatly  by  the  competition  of  cheaper 

wheat,  beef,  and  pork   produced  in  the  United  States. 

In  the  eastern  portion  of  this  country  agricultural  rents 

have  been  lowered  by  the  opening  up  of  the  wheat  lands 

of  the  West.     Many  farms  in  New  England  cpjinot  be 


410  PRINCIPLES   OF  ECONOMICS. 

rented  for  enough  to  pay  interest  on  buildings  and  im- 
provements on  the  land.  If  we  set  off  these  decreases 
against  the  increases  of  rent  that  have  been  caused  by 
social  development,  the  net  unearned  increment  received 
by  landowners,  as  a  class,  is  very  much  smaller  than  is 
usually  represented. 

Only  in  the  case  of  landowners  who  own  particularly 

desirable  tracts  of  land  can  it  be  claimed  that  there  is  a 

Yet  the  un-      great   unearned   increment.     Some   favored 

earned  incre-  situations  in  the  business  centers  of  cities, 

ment  is  very 

large  in  indi-   some  sites  available  for  docks,  for  terminal 
facilities    for   railroads,   etc.,   have    become 
enormously  valuable,  so  that  a  large  unearned  increment 
has  been  received.1 

VII.  Wages. 

§  277.    Primarily,  wages  are  the  reward  received  by 
hired  laborers.     The  term  is  extended  sometimes  to  in- 
Definition  of    dude  the  independent  incomes  received  by 
wages.  workers  who  carry  on  any  sort  of  produc- 

tive  activity   upon    their    own    account ;    but    for   the 
present  we  shall    investigate  the   laws  that  determine 
the   reward,  the   dependent   income,  secured    by  hired 
laborers. 
Nominal  wages  are  the  amounts  of   money  received 
Real  and  nom-  hv  laborers  during  any  specified  time.    Real 
inai wages.      wages  are  the  "necessaries,  comforts,  and 
luxuries"    that    the    laborer    is    able    to    command    as 

1  In  the  case  ut'  city  Iota  the  increment  of  land  values  is  partly  offset 
by  assessments  Eor  a  large  pari  of  the  expense  Eor  improvements,  such 
as  sewers,  street  paving,  etc.,  that  benefit  the  property  directly. 


WAGES.  411 

remuneration  for  his  labor.  If  one  laborer  receives 
higher  nominal  or  money  wages  than  another,  hut  is 
obliged  to  pay  more  for  most  of  the  commodities  that  he 
is  accustomed  to  buy,  then  his  real  wages  may  be  no 
higher.  Furthermore,  two  laborers  may  receive  the 
same  money  wages,  but  one  may  receive  house  rent  or 
board  free,  or  may  be  given  various  privileges,  that  enable 
him  to  make  his  money  go  further  in  supplying  his 
wants.  In  such  a  case,  the  real  wages  of  the  two  men 
would  not  be  the  same. 

§  278.  Persons  who  work  for  hire  sometimes  receive 
returns  that  are  called  salaries,  not  wages.  It  is  impor- 
tant to  distinguish  between  the  two  forms  -wages  and 
of  income.  The  first  difference  is  that  a  salaries, 
salary  continues  as  long  as  the  person  receiving  it  is  in 
the  employ  of  the  entrepreneur  who  pays  it.  On  the 
other  hand,  wages  generally  stop  the  moment  work  is 
interrupted.  Second,  salaried  employees  are  usually 
engaged  for  more  definite  terms  that  sometimes  are  of 
long  duration  ;  while  the  wage  earner  has  a  less  secure 
tenure  of  his  position.  Third,  persons  who  receive  sal- 
aries generally  stand  in  closer  personal  relations  with 
their  employers,  and  are  more  likely  to  occupy  equal 
social  positions. 

§  279.  Time  wages  are  wages  paid  according  to  the 
time  that  a  laborer  works.  Piece  wages  are  paid  accord- 
ing to  the  quantity  of  work  that  is  done. 

°  l  j  Time  wages 

Men   employed    on    time  wages    have    less     and  piece 

direct  interest  in  making  their   product  as 

large  as  possible ;  so  that  piece  workers  often  do  more 


412  PRINCIPLES   OF  ECONOMICS. 

work  in  a  given  length  of  time,  and  may  earn  more 
money  each  day. 

But  it  usually  holds  true  that  men  producing  the  same 

commodity  receive  about  the  same  wages  for  each  unit 

of  product,  whether  paid  by  the    day  and 

But  labor-cost  T  ..       ,. 

tends  to  be  the  week  or  by  the  piece.     In  other  words,  the 

same  under      iaDor_cost  of  each  unit  of  a  commodity  tends 
both  methods  J 

of  remunera-  to  be  nearly  the  same.  Competition  among 
employers  can  produce  no  other  result.  An 
employer  who  produces  at  a  much  higher  rate  for 
the  labor  expended  upon  each  unit  of  product,  will  be 
likely  to  be  driven  out  of  business  unless  he  possesses 
some  advantage  that  compensates  for  this  greater  labor- 
cost.  Finally,  the  student  needs  to  be  reminded  that 
there  is  no  necessary  connection  between  high  rates  of 
daily  or  weekly  wages  and  a  high  labor-cost  for  each  unit 
of  output,  or  between  low  earnings  and  low  labor-cost. 
Efficiency  of  the  labor  as  well  as  the  daily  or  weekly 
wages  must  be  considered  in  determining  whether  the 
labor-cost  is  high  or  low.1  In  general  it  may  be  said 
that  laborers  receiving  higher  time  wages  are  more 
efficient  than  those  whose  wages  are  low.  But  this 
greater  efficiency  is  not  always  proportioned  to  the  dif- 
ference in  the  rates  of  wages.  Sometimes  it  has  been 
shown  to  be  less,  at  other  times  more,  than  this  difference. 
§  280.  The  person  who  does  not  possess  the  capital 
necessary  to  enable  him  to  undertake  production  on  his 

1  On  the  subject  of  efficiency,  see  §  77.  See  Hohson,  Evolution  of 
Modern  <  !apitnlism,  261-284  ;  Brassbt,  Work  and  Wages  ;  Walker, The 
Wages  Question  ;  Schoenhof,  The  Economy  of  High  Wages. 


WAGES.  413 

own  account  must  become  a  hired  laborer  by  selling  bis 

services  to  some  employer.    The  wages  contract  is  made 

before  work  is  undertaken,  and  wages  must  „ 

°  General  con- 

be  determined  some  time  in  advance  of  the  siderations 

,  „    ,.  ,  ,r  ,,  concerning 

sale    oi    the   product.      Moreover,   the    cm-  wages  of  the 

ployer  is  obliged  by  law  to  pay  the  stipu-  Mred  laboren 
lated  wages  whether  the  product  prove  salable  or 
unsalable.  Evidently  he  has  to  estimate  carefully  the 
probable  future  value  of  the  goods  produced.  There- 
fore wages  have  been  called  "  the  discounted  product  of 
industry,"  and  defined  as  "  what  capitalists  are  ready  to 
advance  on  the  expectation  of  a  future  return."  When- 
ever the  process  of  production  is  so  long  that  weeks  or 
months  elapse  before  the  product  is  completed  and 
marketed,  then  laborers  receive  weekly  or  monthly  wages 
a  considerable  time  before  any  money  return  is  received 
from  their  work.  Under  such  circumstances,  employers 
cannot  undertake  enterprises  unless  they  have  at  their 
disposal  sufficient  funds  to  enable  them  to  advance 
weekly  or  monthly  wages,  during  the  time  that  must 
elapse  before  any  return  is  secured  from  the  sale  of  the 
product. 

§  281.  The  question  of  wages  must  be  studied  in  two 
aspects :  First,  we  must  investigate  the  forces  that 
determine  whether  the  entire  laboring  class  General  and 
of  a  country  or  a  section  secures  a  larger  or  relatlve wages, 
a  smaller  quantity  of  real  wages,  of  the  "  necessaries, 
comforts,  and  luxuries  of  life."  Why  is  it,  for  instance, 
that  the  wages  received  by  the  entire  class  of  wage- 
earners  have  been  greater  in  the   United   States  than  in 


414  PRINCIPLES   OF  ECONOMICS. 

Europe  ?  This  question  is  the  problem  of  general  wages. 
Secondly,  we  may  inquire  into  the  causes  that  determine 
the  various  rates  of  wages  that  are  paid  to  different 
individual  laborers  or  groups  of  laborers  within  a  country. 
On  what  grounds,  for  instance,  can  we  explain  the  differ- 
ent wages  paid  to  various  classes  of  laborers  within  the 
United  States?  This  is  the  question  of  relative  wages. 
General  wages  must  be  first  considered. 

§  282.    General  wages,  or  wages    considered   as   the 

share  of  the  social  income  received  by  the  entire  class  of 

hired   laborers,  are   a   varving   share   of   a 

General 

wages,  or       varying  product.     If  the  productivity  of  the 


industry  of  a  society  is  great,  then  the  social 


wages  as  the 
snare  of  the 

class  of  hired   income  will   be  large,  and  the  quantity  of 

laborers  in  D   '  i  J 

the  national  commodities  or  services  received  by  laborers 
may  be  large.  In  the  second  place,  the 
share  or  portion  of  the  social  income  received  by  the 
laboring  class  will  be  larger  or  smaller  in  proportion 
to  the  advantages  or  disadvantages  under  which  the 
hired  laborers  make  wage  contracts  with  their  employers. 
Wages  may  possibly  increase  somewhat  at  the  expense 
of  the  share  of  the  product  that  goes  to  employers,  or 
they  may  increase  as  a  result  of  increased  productiv- 
ity without  decreasing  the  shares  of  the  employing 
classes. 

§  283.  General  wages  find  an  upper  limit  beyond 
which  they  cannot  absorb  a  larger  share  of  the  social 
income.  They  cannot  claim  permanently  so  large  a  por- 
tion  of  the  product  that  employers  will  be  discouraged 
from  undertaking  or  carrying  on  business  enterprises. 


WAGES.  41.5 

If  they  should  ever  rise  so  high,  the  number  of  indus- 
tries would  diminish,  the  general  demand  for  labor 
would  decrease,  and  wages  would  necessarily  fall  sooner 
or   later.     Neither   can   wages  absorb  per- 

°  >   L  The  limits  to 

manently  so  much  of  the  product  that  inter-  me  increase 
est  cannot  be  paid  to  capitalists.  If  this  °  wage8, 
should  happen,  the  supply  of  capital  would  diminish  and 
the  demand  for  labor  would  gradually  fall  off.  Moreover, 
wages  cannot  absorb  the  share  of  the  product  that  goes 
to  landowners  in  the  form  of  rent.  This  share  is 
received  on  account  of  differences  in  the  advantages 
offered  by  various  tracts  of  land,  and  cannot  be  absorbed 
by  wages. 

Assuming  that  contracts  between  employers  and  labor- 
ers have  determined  the  gross  money  wages   _ 

°  jo        General 

(hence  the  general   wages)    of    the    wage-  wages  limited 

,  ,   ,,  n  .    ■       somewhat  by 

earning  classes  01  the  country  tor  a  certain  pastindus- 
period,  then  we  may  notice  a  further  limi-  try" 
tation  to  general  wages.     Laborers  may  dispose  of  their 
money  wages  in  four  ways :  — 

1.  In  the  purchase  of  consumable  commodities  that 
have  recently  been  completed.  Thus  from  sixty  to 
eighty  per  cent  of  a  laborer's  income  is  expended  for 
food,  clothes,  fuel,  light,  and  a  few  luxuries. 

2.  In  the  purchase  or  hire  of  consumable  commodities 
that  may  have  been  completed  many  years  previous. 
Thus  laborers  spend  from  twelve  to  fifteen  per  cent  of 
their  income  for  house  rent.  Some  buy  the  houses  in 
which  they  live. 

3.  In  the  purchase  of  personal  services.     This  is  a 


416  PRINCIPLES   OF  ECONOMICS. 

small  item  in  the  expenditure  of  the  majority  of  hired 
laborers. 

4.  Finally,  part  of  the  income  may  be  saved.  This 
means  that  it  is  invested  in  capital  either  directly  or 
indirectly.  In  this  country  the  deposits  in  the  savings 
banks  in  1894  amounted  to  $1,810,000,000,  the  larger 
part  of  which  belonged  to  wage-earners. 

In  so  far  as  the  laborers  spend  their  wages  for  consum- 
able commodities,  —  and  such  expenditures  form  sixty 
or  eiditv  per  cent  of  the  total,  —  they  are 

This  is  be-  °     J     *  '  J 

cause  indus-  dependent  upon  the  supplies  of  consumable 
tosomjfex16'1  goods  now  in  the  markets.  But  these  con- 
tent by  sumable  goods  in  the  market  are  the  prod- 

capital. 

uct  of  capital  and  labor  invested  in  the  past, 
and  are  only  slightly  increased  out  of  the  product  of  the 
week  or  month  for  which  the  laborer  is  paid.  There- 
fore, the  amount  of  consumable  commodities  that 
laborers  can  buy  with  their  money  wages  depends  chiefly 
upon  past,  not  upon  current  industry.  Modern  capital- 
istic production  requires  time,  and  the  goods  in  the 
market  this  week  or  this  month  are  largely  the  products 
of  the  industry  of  past  months  or  even  years.  If 
laborers  expend  their  incomes  for  house  rent  or  for 
houses  or  for  capital  goods,  they  may  draw  to  a  very 
large  extent  upon  the  products  of  industry  for  two  or 
three  decades  past.  But  money  wages  expended  for 
such  goods  as  food,  clothing,  fuel,  etc.,  can  command 
merely  the  products  of  the  last  few  months  or  the  last 
year  or  so.  Therefore,  the  quantity  of  such  goods 
secured  by  the  entire  laboring  class  of  a  country  cannot 


WAGES.  117 

be  increased  beyond  the  limits  set  by  the  productivity  of 
the  industry  of  the  immediate  past.  It  is  possible  for 
them  to  increase  gradually  as  the  productivity  of  a 
country's  industries  increases. 

§  284.  Economists  have  recognized  that  the  laborers' 
"standard  of  living"  sets  limits  below  which  general 
wages  cannot  fall.  The  standard  of  living  me  limits 
of  the  wage-earning  classes  is  the  quantity  J^7^es 
of  the  necessaries,  comforts,  and  luxuries  of  cannot  fan. 
life  that  laborers  are  accustomed  to  enjoy.  We  have 
already  seen  that  this  is  a  force  that  limits  the  growth 
of  population,  hence  the  supply  of  labor  (  §  78).  A 
sudden  increase  of  the  labor  supply  makes  the  conditions 
unfavorable  for  the  hired  laborers  when  they  make  their 
wages  contracts,  while  a  decrease  in  the  supply  will 
make  the  conditions  more  advantageous.  Changes  in 
the  supply  of  labor  tend  to  adjust  general  wages  to  the 
standard  of  living. 

But  the  laborers'  standard  of  living  cannot  influence 
general  wages  permanently  except  as  it  affects  the  sup- 
ply   of    labor.      Now   the    supply    of    labor  But  the  sup- 
changes  slowly,  and  a  whole  generation  may   change1^ 
be  needed  to  effect  a  considerable  change,   slowly, 
unless  emigration  or  immigration  take  place.     Leaving 
these  last  forces  out  of  consideration  for  the  moment,  it 
is  apparent  that  if  wages  fall  below  the  present  standard 
of  living,  the  supply  of  labor  will  not  decrease  quickly. 
Therefore  the   standard   may  be   lowered    temporarily. 
When  this  occurs,  there  is  danger  that  the  rising  genera- 
tion of  laborers  may  be  brought  up  on  a  lower  plane  of 


418  PRINCIPLES  OF  ECONOMICS. 

comfort ;  and,  becoming  accustomed  to  it,  may  not  limit 

their   numbers.     Then   the   standard   may  be   lowered 

permanently. 

If  laborers  are  able  to  migrate  to  other  places  where 

wages  are  higher,  then  it  is  easier  to  maintain  the 
The  influence  standard  of  living.  If  wages  fall  below 
of  emigration   ^ne   accustomed   standard,   emigration   will 

and  inunigra-  ° 

tion.  decrease   the  supply  of  labor  more  quickly 

and  will  make  it  easier  to  restore  wages  to  the  former 
level.  On  the  other  hand,  if  immigration  brings  into 
the  country  a  supply  of  laborers  having  a  lower  stand- 
ard of  living,  then  it  will  be  harder  to  maintain  the 
existing  standard.  In  the  United  States  it  has  often 
proved  true  that  immigrants  have  desired  to  improve 
their  standard  of  living,  and  have  not  tended  so  much 
to  depress  the  standard  of  American  laborers.  But 
of  many  of  the  immigrants  that  have  crowded  into  our 
large  cities  this  has  not  proved  true. 

Whenever  there  is  an  abundance  of  free  land,  hired 
laborers  find  it  easier  to  maintain  a  high  standard  of 
The  effect  of  living.  In  this  country  it  has  been  so  easy 
free  land.  £or  iaoorers  t0  acquire  fertile  land  and  to 
engage  in  farming  on  their  own  account,  that  the 
supply  of  hired  laborers  has  been  reduced  quickly  and 
easily  whenever  wages  have  fallen  below  the  income 
that  could  be  secured  from  agriculture.  In  the 
future,  American  wages  will  be  less  affected  by  this 
influence. 

Some  writers,  especially  the  socialists  at  the  present 
time,  have  assumed  that  the  standard  of  living  must 


WAGES.  419 

necessarily  be  low;  and  that  wages  tend  normally  to 
fall  to  the  very  lowest  point  where  the  laborers  can 
possibly  keep  themselves  alive  and  main-  The  standard  of 
tain  the  supply  of  labor.  But  this  is  en-  ^SLuy^ 
tirely  false;  for  the  standard  of  living  has  raked, 
steadily  advanced  during  the  past  half-century,  and 
may  do  so  in  the  future.  Its  advance  depends  upon 
forces  that  are  partly  within  the  control  of  the  la- 
borer. Public  education,  that  broadens  the  outlook  and 
the  interests  of  the  laborer,  tends  to  make  him  demand 
broader  opportunities,  and  to  refuse  to  bring  into  the 
world  children  for  whom  he  cannot  provide  a  fair  start 
in  life.  Moral  elevation,  and  everything  that  tends 
to  make  him  more  of  a  man,  elevates  the  standard  of 
his  living.  The  same  causes  enable  the  laborers  to 
combine  in  order  to  secure  by  intelligent  action  all 
the  wages  that  are  their  just  dues.  These  facts  are  ap- 
preciated by  the  working  classes  as  never  before,  and 
we  may  expect  a  continued  rise  of  the  standard  of  liv- 
ing. Finally,  increased  wages  secured  in  this  manner 
would  not  be  gained  at  the  expense  of  other  classes  in 
the  community.  Greater  efficiency  is  a  natural  result 
of  an  improved  standard  of  living,  and  such  an  advance 
in  the  condition  of  the  laboring  classes  increases  the 
social  income  out  of  which  the  higher  wages  must 
come. 

§  285.  We    must   now   consider   why   the  wages  re- 
ceived by  hired   laborers  differ    in   various     Relative 
employments.     Manifestly,  Laborers  compete     wages, 
with. one  another  as  far  as  possible  for  the  most  desir- 


420  PRINCIPLES   OF  ECONOMICS. 

able  positions ;  and  it  is  necessary  to  explain  why  this 
competition  does  not  produce  the  same  rate  of  wages  in 
all  employments. 

Laborers  in  their  rivalry  with  each  other  compete  for 

those   positions  that  offer  the  greatest  net  advantages. 

Other  things  besides  the  nominal  money  in- 

Competition  ■* 

among  labor-    come   make  the  competition  for  any  place 

ers  is  directed  ■,  .    ,  r>     •  1        ^i  1 

toward  occu-   m°re  or  less  intense.     Besides  the  nominal 
pations  off er-  wao-es    offered,   laborers   may    consider  the 

ing  highest  s  '  J 

"netadvan-    question  of  the  continuity  or  the  certainty 

of  employment,  preferring  lower  wages 
with  constant  employment.  Also  they  may  consider 
the  chances  for  failure  or  success  in  their  work.  If 
success  is  doubtful,  competition  will  be  less  intense. 
Furthermore,  laborers  may  consider  the  agreeableness 
or  disagreeableness  of  the  employment,  preferring 
agreeable  work.  Natural  tastes  and  inclinations  affect 
their  decisions  on  these  points.  The  varying  social 
esteem  in  which  different  employments  are  held  is  an- 
other important  consideration.  Finally,  the  intensity 
and  duration  of  the  exertion,  both  physical  and  mental, 
affect  laborers'  judgments  in  such  matters.1  Any  em- 
ployment will  appear  more  or  less  desirable  according 
to  the  net  advantages  offered  after  all  these  considera- 
tions are  taken  into  account. 

§  286.  It  is  easy  to  show  that  all  laborers  are  not 
able  to  enter  into  competition  for  the  same  positions, 
even  if  all  should  estimate  the  net  advantages  in  pre- 

1  Bead  Adam  Smith's  account  of  the  causes  of  differences  in  relative 
wages,  "  Wealth  of  Nations,"  Bk.  I.  Chap.  10. 


WA  GES.  421 

cisely  the  same  manner.     Hired  employees  are  divided 
into    non-competing   groups,    among  whieh  Non-competing 

....        .  »     .         .       ,.         ,,  groups  among 

competition  is  very  imperfect  or  is  altogether  laborers, 
lacking-.     These  groups  are  based  upon  at  least  five  sets 
of  causes  :  — 

1.  Differences  in  intellectual  ability.  Some  men  are 
unlit  for  responsible  positions,  and  unable  to  compete  for 
positions  requiring  any  high  degree  of  intellectual  ability. 

2.  Differences  in  moral  characteristics.  In  many 
positions  of  responsibility  the  fitness  of  the  employee 
may  depend  largely  upon  his  moral  character. 

3.  Differences  in  training  and  education,  both  general 
and  special.  General  education  may  increase  a  man's 
fitness  for  many  positions,  while  special  training  of  a 
technical  character  must  be  possessed  by  all  who  desire 
to  secure  employment  as  skilled  workmen. 

4.  Differences  in  physical  health,  strength,  and  en- 
durance. 

5.  Poverty  and  ignorance.  These  render  laborers 
unable  to  learn  where  better  opportunities  for  employ- 
ment may  be  found,  and  make  it  difficult  or  impossible 
for  them  to  move  to  the  place  where  more  favorable 
openings  might  be  secured. 

Among  non-competing   groups  of   laborers  a  certain 

competition  may  exist  in  the  long  run,  because  it  may  be 

possible  for  the  children  of  one  group  to  fit 

'  .         Further 

themselves  for  positions  in  others.     Tben,  if     considera- 

•    i       j  .  tions. 

any  group  enjoys  special  advantages,  more 
young  persons  will  strive   to  enter  that  trade  or  pro- 
fession.    Public   education   is  of   great   importance    in 


422  PRINCIPLES   OF  ECONOMICS. 

making  possible  this  indirect  competition  among  dif- 
ferent groups.1  Improved  means  of  transportation  and 
facilities  for  spreading  intelligence  tend  to  increase 
competition  among  those  persons  already  located  in 
particular  industries.  Yet,  when  all  these  allowances 
are  made,  there  remain  well-defined,  non-competing 
groups.  The  lowest  groups  are  the  largest,  and  include 
almost  all  unskilled  laborers,  who  are  not  protected 
from  the  competition  of  their  fellows  by  the  possession 
of  special  training  or  skill.  Such  laborers  often  have  no 
choice  whatever  in  their  work,  and  must  accept  whatever 
comes  to  hand.  Even  in  the  most  unhealthy  and  dis- 
agreeable occupations  wages  are  often  low  because  the 
workers  have  no  alternative  open  to  them.  Above  these, 
come  groups  of  skilled  workmen  separated  from  each 
other  by  the  difficulties  of  changing  from  one  trade  to 
another.  Then  come  the  lower  grades  of  persons 
engaged  in  labor  of  a  more  intellectual  character. 
Finally,  there  are  small  groups  of  responsible  brain- 
workers,  possessing  unusual  abilities  and  enjoying 
exceptional  training. 

§  287.    We  are  now  ready  to  explain  differences  in 

relative  wages.     The  first  thing  to  notice  is  that  society 

The  causes  of   must  pay  for  a  given  supply  of  any  commodity 

irrelative      or  services  a  price  high  enough  to  cover  the 

wages.  marginal   expenses  of  producing  it.     These 

marginal  expenses  include  the  cost  for  labor,  so  that  we 

1  Trade  unions  sometimes  try  to  restrict  the  number  of  apprentices  that 
enter  particular  trades.  In  ho  doing  they  tend  to  obstruct  this  indirect 
competition  among  different  groups. 


WAGES.  423 

may  say  that  the  price  of  any  commodity  or  service 
must  be  high  enough  to  enable  employers  to  pay  suffi- 
cient wages  to  secure  the  highest-priced  laborers  needed 
to  produce  the  required  supply.  Then,  leaving  the 
employer  out  of  consideration,  we  may  conclude  that 
the  supply  of  any  commodity  or  service  will  be  so 
regulated  that  its  price,  or  its  marginal  utility  to 
society,  will  balance  the  expense  of  securing  the  most 
expensive,  or  marginal,  portion  of  the  labor  needed  to 
produce  the  supply.  Relative  wages,  therefore,  are  de- 
termined by  a  balancing  of  the  forces  of  demand  and 
supply. 

In   the  chapter  on   value,  it  has    been   shown   that 
demand  depends  upon  the  marginal  utility  of  the   com- 
modity or  service  to  society.     It  remains  to    Forces  that 
explain  briefly  the  operation   of  the  forces    demandaii<i 
that  control    the   supply  of   labor  available    supply, 
for   the    production    of    any    particular    commodity    or 
service.     The    supply    available    is   determined  by   the 
difficulty   of    securing   men    of    the  ability,   character, 
strength,  and  training  required  for  the  performance  of 
the  work  necessary  to  the  production  of  the  goods  in 
question.     This  difficulty  will  be  greater  or  less  according 
to  the  following  circumstances  :  — 

1.  Tbe  responsibilities  imposed  upon  workers,  and  the 
intellectual  and  moral  qualifications  required. 

2.  The  extent  of  the  training,  education,  and  acquired 
skill  that  must  be  possessed  by  the  worker. 

3.  The  intensity  of  the  exertion,  whether  mental  or 
physical. 


■424  PRIXCIPLES   OF  ECONOMICS. 

4.  Agreeableness  and  healthfulness  of  the  work  ;  also 
the  social  esteem  in  which  the  laborer  is  held. 

5.  In  this  connection,  the  student  must  notice  that  the 
family  is  often  the  economic  unit.  When  the  wife  or 
children  are  able  to  enter  the  trade,  and  thus  increase 
the  earnings  of  the  family  above  the  former  level,  the 
wages  received  by  the  father  are  likely  to  fall,  because 
the  expense  of  securing  his  services  is  less  than  it  would 
be  if  he  were  obliged  to  support  the  family  wholly  out 
of  his  earnings. 

VIII.  Profits. 

§  288.  Any  person  who  possesses  capital,  or  can 
induce  other  people  to  place  capital  in  his  control,  may 
The  position  of  enter  almost   any   line  of    industry    as  an 

the  entrepre-    organizer  and  independent  manager  of  busi- 
neuror  °  re 

undertaker,  ness,  and  an  employer  of  labor.  The  em- 
ployer's, or  entrepreneur's,  chances  for  making  a  profit 
from  his  investment  of  capital  depend  upon  his  ability 
to  produce  and  sell  products  for  more  than  he  expends 
in  placing  them  in  the  market.  The  expectation  of  mak- 
ing such  a  profit  induces  men  to  undertake  the  cares 
and  responsibilities  of  business  management. 

The  investment  of  labor  and  capital  in  any  line  of 
production  is  attended  by  more  or  less  risk.  It  is 
Therisksof  possible  that  the  product  of  the  enterprise 
investment.  mnv  U()^  |1C  jn  sufficient  demand  to  make 
the  investment  remunerative.  It  is  possible  that  other 
producers  may  be  able  to  supply  1  lie  demand  more 
cheaply.     Tn  case  a  business  enterprise  fails  to  find  a 


PROFITS.  1 25 

remunerative  demand  for  its  product,  or  is  unable  to 
make  a  profit  by  selling  at  prices  as  low  as  those  offered 
by  competitors,  then  the  labor  and  capital  invested  in  it 
have  been  misapplied.  Every  such  failure  causes  a  social 
loss,  and  it  is  important  to  avoid  unnecessary  wastes  of 
this  character.  The  law  throws  upon  the  employer,  or 
entrepreneur,  the  primary  responsibility  for  such  losses. 
People  are  allowedvt»  establish  enterprises  only  upon 
condition  that  they  assume  the  risk  of  failure.  Entre- 
preneurs must  satisfy  all  obligations  that  they  incur 
before  they  can  secure  any  profits  from  their  invest- 
ments. In  case  of  loss,  the  entrepreneur  must  meet  his 
obligations  by  drawing  upon  his  capital.  By  throwing 
upon  employers  the  risks  of  business  management,  so- 
ciety constantly  eliminates  inefficient  managers  and 
places  the  control  of  its  productive  forces  in  the  hands 
of  those  organizers  who  prove  themselves  most  efficient. 
Society  can  afford  to  allow  successful  managers  to  make 
large  profits,  if,  by  so  doing,  it  is  guaranteed  the  most 
effective  control  and  direction  possible  under  present 
conditions. 

§  289.   The  profits  received  by  employers  may  be  di- 
vided into  two  classes,  namely,  necessary  and  differential 

profits.     Necessary  profits  are  the  minimum 

Necessary  and 
returns   that  society   must    pay    to   all    the  differential 

employers  needed    to    furnish  the  requisite  prois* 

supply  of  any  commodity.     If   fifty  employers  arc  em 

gaged    in    furnishing   the    needed    supply   at    a   certain 

price,  we  know  that  the  price  will  be  high  enough  to 

cover   the  expenses  of   producing  the   most   expensive 


426  PRINCIPLES  OF  ECONOMICS. 

or  marginal  portion  of  the  supply.  Any  employers  who 
try  to  enter  the  business,  but  are  unable  to  sell  at  this 
price,  will  have  to  fail  and  give  up  their  attempts  to 
compete.  But  the  marginal  producers,  who  furnish  the 
most  expensive  portion  of  the  supply,  just  manage  to  get 
a  fair  return  on  their  investments.  Prices  must  be  high 
enough  to  allow  marginal  employers  to  secure  a  neces- 
sary or  minimum  profit.  Other  employers  who  produce 
goods  at  less  than  this  marginal  expense  will  secure,  not 
only  necessary  profits,  but  also  a  further  differential 
profit  that  depends  upon  the  differences  in  their  costs 
of  production. 

§  290.    The   necessary    profits    received    by   all   em- 
ployers, even  the  marginal  ones,  are  composed  of  two 
Necessary        elements.     First,  they  include  interest   on 
profits.  invested  capital,  computed  at   the  current 

market  rates.  If  employers  could  not  secure  interest 
on  their  capital  sufficient  to  cover  the  difference  between 
future  and  present  income,  investments  would  diminish; 
and  prices  of  commodities  would  rise  high  enough  to 
insure  an  adequate  return  to  capital.  The  second  ele- 
ment in  necessary  profits  is  the  remuneration  for  the 
efforts  and  trouble  that  employers  incur  in  the  manage- 
ment of  productive  enterprises.  Economists  call  this 
element"  wages  of  superintendence,"  a  term  that  empha- 
sizes the  resemblance  of  this  part  of  necessary  profits  to 
the  wages  of  labor.  The  resemblance  is  marked  because 
both  forms  of  income  are  returns  for  personal  exertion. 
Furthermore,  both  are  governed  by  the  same  principle, 
namely,  that  the  remuneration  must  be  sufficient  to  cover 


PROFITS.  427 

the  cost  of  securing  a  sufficient  supply  of  workers.  In 
computing  necessary  profits,  finally,  good  years  must  be 
averaged  with  bad.  Some  years  a  business  may  yield 
no  profits  whatever,  or  may  yield  less  than  necessary 
profits.  In  others  the  returns  may  be  above  the  mini- 
mum rate.  But  taking  a  term  of  years  into  considera- 
tion, we  may  safely  conclude  that  marginal  employers 
must  secure  the  current  rate  of  interest  on  their  capital 
and  a  fair  return  for  their  personal  exertion. 

§  291.  Those  employers  who  produce  goods  for  less 
than  the  marginal  expense,  for  which  the  consumers 
have  to  recompense  the  marginal  employers,  Differential 
secure  differential  profits.  These  returns  i>roflts- 
are  called  "  pure  profits  "  by  some  economists.  It  is 
the  prospect  of  these  extra,  unusual  gains  that  leads 
men  to  prefer  the  greater  risks  and  cares  of  business 
management  to  the  smaller  risks  and  cares  of  lending 
their  capital  to  active  managers.  The  amount  of  these 
differential  profits  depends  upon  the  extent  of  the  ad- 
vantage which  these  superior  entrepreneurs  have  over 
the  marginal  producers.  This  advantage  may  arise  from 
the  following  causes  :  — 

1.  It  may  come  from  superior  personal  ability.  The 
success  of  a  business  depends  upon  able  management 
even  more  than  upon  efficient  labor.  Bad  judgment  in 
the  purchase  of  materials  or  in  the  sale  of  the  product 
may  make  all  the  difference  between  success  and  failure. 
Thorough  supervision  and  efficient  organization  of  all 
branches  of  the  business  have  much  to  do  with  success 
in  producing  at  a  low  cost.     Superior  personal  ability  of 


428  PRINCIPLES  OF  ECONOMICS. 

the  employer  accounts  for  part  of  the  differential  profits 
secured  by  some  enterprises. 

2.  The  possession  of  patents  may  enable  an  employer 
to  produce  at  less  than  the  marginal  expense,  and  so  to 
secure  a  differential  profit.  In  the  words  of  Mr.  Mill, 
"  If  the  value  of  the  product  continues  to  be  regulated 
by  what  it  costs  to  those  who  are  obliged  to  persist  in 
the  old  process,  the  patentee  will  make  an  extra  profit 
equal  to  the  advantage  which  his  process  possesses  over 
theirs." 

3.  Mere  chance  or  good  fortune  sometimes  enables 
some  employers  to  secure  differential  profits. 

Differential   profits  are  likely   to  be  of  a  temporary 

character.    The  personal  ability  of  the  entrepreneur  may 

General  con-    enable    the    differential    profit    to   continue 

siderationson  during  his  iifetime,  but  at  his  death  it  is 

differential  ° 

profits.  likely  to  cease.     We  have  notable  instances 

of  great  organizers  who  have  earned  immense  personal 
profits  that  were  not  secured  from  the  businesses  after 
the  founders  died.  Moreover,  such  personal  profits  are 
likely  to  disappear  as  soon  as  other  producers  succeed  in 
producing  at  the  same  cost.  This  is  happening  continu- 
ally. The  marginal  cost  of  production  steadily  falls, 
and  the  advantage  possessed  formerly  by  superior  em- 
ployers is  lessened.  In  general  it  can  be  said  that  pure 
profits  consist  "  of  wealth  created  by  the  powers  of  given 
undertakers  over  and  above  what  would  have  been  pro- 
duced by  the  same  application  of  labor  and  capital  under 
l<'ss  efficient  leadership  or  management."  They  are  a 
surplus  that  does  not  affect  prices,  since  they  are  deter* 


PROFITS.  429 

mined  by  the  marginal  expenses  of  production  under 
the  least  efficient  employers  that  arc  able  to  keep  in 
business.  "  Anger  at  the  great  captains  of  industry  on 
account  of  the  pure  profits  which  they  acquire  is  not 
only  groundless  but  insane.  Rather  it  is  the  stupid  and 
unsuccessful  undertakers  who  deserve  blame,  sinking 
capital  and  starving  laborers." 

§  292.  The  profits  secured  by  managers  of  monopo- 
listic undertakings  differ  from  the  profits  gained  in  com- 
petitive enterprises.  The  causes  that  enable  Monopoly 
entrepreneurs  to  secure  the  power  to  fix  prices  Profits- 
at  the  point  of  highest  net  returns  have  been  discussed  in 
a  previous  chapter.  These  are  rare  personal  abilities, 
exclusive  legal  rights  and  privileges,  the  monopoly  of 
natural  agents,  or  capitalistic  organization.  The  amount 
of  the  profits  gained  by  the  monopolist  will  depend  upon 
two  circumstances :  — 

1.  It  will  depend  upon  the  amount  of  his  product  that 
he  can  sell  before  he  reaches  the  point  of  highest  net 
returns,  at  which  an  increased  product  would  lower  prices 
so  that  the  net  profits  from  his  sales  would  be  decreased. 
This  can  be  expressed  in  another  way.  Monopoly  profits 
will  depend  upon  the  amount  of  capital  that  can  be  in- 
vested in  the  business  before  the  product  becomes  so 
great  as  to  oblige  the  monopolist  to  sell  it  at  a  lower 
price  than  that  which  yields  the  highest  net  returns. 

2.  It  will  depend  upon  the  surplus  of  price  above  cost 
on  each  unit  of  supply,  on  the  product  of  each  unit  of 
invested  capital. 

When  a  monopoly  arises,  not  from  rare  personal  abili- 


430  PRINCIPLES   OF  ECONOMICS. 

ties,  but  from  legal  rights  and  franchises,  from  rare 
natural  agents,  or  from  capitalistic  organi- 
profitsmay  zation,  the  monopoly  profits  may  be  of  a 
permanent  permanent  character.  It  is  true  that  new 
character.  inventions  and  new  business  methods  may 
destroy  such  a  monopoly,  yet  the  profits  secured  from 
such  a  business  are  not  personal,  and  are  not  due  to  the 
skill  of  one  man.  For  this  reason  they  are  sufficiently 
permanent  in  character  to  make  it  possible  to  capitalize 
them  and  transfer  them  to  other  persons.  Suppose  that 
patents,  rare  natural  agents,  or  capitalistic  organization 
enable  an  employer  to  realize  annually  a  net  profit  that 
exceeds  by  $30,000  the  necessary  profits  secured  by  all 
employers.  Then  these  monopoly  profits  may  be  capital- 
ized at  the  current  rate  of  interest,  say  six  per  cent,  and 
the  business  may  be  sold  for  $500,000  more  than  the 
actual  capital  invested  in  it.  There  have  been  many 
instances  in  which  monopolistic  undertakings  have  been 
capitalized  at  from  two  to  five  times  the  actual  investment 
of  capital.  When  the  enterprise  is  of  a  quasi-public 
character,  such  as  a  gas  company  or  a  railroad,  monopoly 
profits  are  often  capitalized  in  order  to  conceal  the  ex- 
cessive profits  realized  on  the  capital  actually  invested. 

Since  monopoly  profits  are  realized  by  limiting  the 

supply  so  that  its  price  can  be  fixed  at  the  point  of  high- 

Conciuding      est  net  returns,  it  follows  that  they  are  a 

considerations  r   \  •    i  •  t  n 

on  monopoly     ca,isc  of  hl8'n   Pnces.      All  consumers  pay 

profits.  more  than  if  prices  were  fixed  at  the  point 

where  they  covered  the  marginal  expenses  of  production, 

as  I  hey  are  in  competitive  undertakings.    When  monopoly 


LITERA  TURE.  43.1 

profits  arc  capitalized  and  the  business  sold  on  the  basis 
of  such  capitalization,  consumers  will  continue  to  pay 
a  monopoly  price,  while  the  managers  of  the  enterprise 
will  secure  only  an  average  rate  of  profit  on  their  inflated 
capitalization. 


LITERATURE  ON  CHAPTER  XIII. 

General  References :  Andrews,  Institutes  of  Economics,  158- 
189 ;  Boiim-Bawerk,  Capital  and  Interest,  Positive  Theory  of 
Capital ;  Ely,  Outlines  of  Economics,  16G-217 ;  Gide,  Political 
Economy,  473-552;  Gunton,  Social  Economics;  Hapley,  Eco- 
nomics, 26 1— 335  ;  Marshall,  Principles  of  Economics,  5G6-790, 
Economics  of  Industry,  250-411 ;  Mill,  Principles  of  Political 
Economy,  Book  II.  ;  Ricardo,  Principles  of  Political  Economy 
and  Taxation  ;  Roscher,  Political  Economy,  Book  III. ;  Sidg- 
wick,  Principles  of  Political  Economy,  269-398;  Smith,  Wealth  of 
Nations  ;  Walker,  Political  Economy,  187-291 ;  Wieser,  Natural 
Value. 

Special  References :  Clark,  Capital  and  its  Earnings ;  Com- 
mons, The  Distribution  of  Wealth;  Patten,  Dynamic  Economics; 
Taussig,  Wages  and  Capital ;  Cannan,  History  of  Theories  of 
Production  and  Distribution  ;  Davidson,  The  Bargain  Theory  of 
Wages  ;  Spaiir,  The  Present  Distribution  of  Wealth  in  the  United 
States. 


432  PRINCIPLES   OF  ECONOMICS. 


CHAPTER   XIV. 


THE   WAGES   SYSTEM. 


I.  General  Considerations  on  the  Labor  Contract. 
§  293.   The  hired  laborer  sells   his  labor  to   an   em- 
ployer for  a  stipulated  wage.     The  legal  theory  is  that 
The  nature  of  labor  is  property,  and  that  the  laborer  sells 

the  labor  l      r       J 

contract.         his   property  to  an  employer,  —  just  as  the 

owner  of  any  commodity  may  dispose  of  his  property  in 
a  market.  In  this  way  labor  is  called  a  commodity,  and 
the  hired  laborer  is  said  to  dispose  of  his  commodity, 
labor,  in  return  for  stipulated  wages. 

In  theory,  the  modern  labor  contract  is  a  free  con- 
tract, voluntarily  entered  into  by  employer  and  em- 
Freedom  of  ployee.  In  this  country  the  courts  are 
inclined  to  insist  that  this  theoretical  free- 
dom shall  be  maintained,  and  that  the  law  shall  not 
interfere  in  the  purchase  and  sale  of  labor  more  than 
in  dealings  in  other  commodities.  They  often  declare 
laws  unconstitutional  that  attempt  to  prevent  certain 
contracts  from  being  made  by  employers  and  laborers. 
Few  people  realize,  however,  that  the  freedom  now 
claimed  for  the  labor  contract  has  not  always  existed. 
To  consider  merely  the  case  of  England,  it  is  easy  to 


THE   LABOR   CONTRACT.  433 

show  that  this  has  been  developed  largely  during-  the  last 
century.  The  Statute  of  Apprentices  aimed  to  pre- 
vent employers  from  hiring  laborers  who  had  not  served 
a  seven-year  apprenticeship  and  become  connected  with 
some  guild,  while  it  prevented  laborers  from  choosing 
freely  their  occupations.  Acts  of  Parliament  attempted 
to  regulate  rates  of  wages,  intrusting  the  assessment  of 
wages  to  justices  of  the  peace.  These  acts  were  not 
repealed  until  1813  and  1814,  although  they  had  been 
nearly  obsolete  for  some  time  before.  In  other  words, 
the  modern  labor  contract  is  an  historical  product;  it 
has  been  modified  in  the  past  as  it  has  assumed  the 
present  form,  and  it  may  be  modified  in  the  future. 

§  294.  Labor  is  bought  and  sold  in  the  labor  market 
in  much  the  same  way  as  any  other  commodity.  But 
it   is    possible   to   show   that    labor   differs  Labor  is  a 

special  com- 
from  most  other  commodities  in  important  modity,  with. 

respects,  several  of  which  are  here  given.        'f  it?^" 

First,  it  is  evident  that  the  laborer  and  his  work  are 

inseparable.     The  seller  of  other  commodities  parts  with 

them  when  he  effects  his  sale.     "  It  matters  Jhe  laborer  is 

nothing  to  the  seller  of  bricks  whether  they  from  Ms 

are  to  be   used   in  building  a  palace  or  a  ^X™0^*7' 

sewer  ;  but  it  matters  a  great  deal  to  the  seller  of  labor, 

who  undertakes  to  perform  a  task  of   given    difficulty, 

whether  or  not  the  place  in  which  it  is  to  be  done  is  a 

wholesome  and  a  pleasant  one,  and  whether  or  not  his 

associates  will  be  such  as  he  cares  to  have."     Since  the 

worker  is  inseparable  from  his  work,  he  is  concerned  in 

the  conditions   of   his   employment.     The   person   who 


434  PRINCIPLES   OF  ECONOMICS. 

buys  has  to  exercise  necessarily  some  control  over  the 
person  who  sells  labor.  The  buyer  determines  the 
question  of  residence  and  the  place  of  work,  to  a  very 
large  extent.  He  has  more  or  less  control  over  the 
companions  and  all  the  surroundings  of  the  laborer  dur- 
ing working  hours.  This  extends  to  circumstances  that 
affect  the  health  of  the  worker,  such  as  sanitary  condi- 
tions, and  to  those  that  may  affect  his  safety,  as  in  the 
case  of  machinery  that  endangers  both  body  and  life. 
Finally,  the  labor  contract  involves  a  large  degree  of 
control  by  the  employer  over  the  length  of  the  working 
day  and  the  time  of  beginning  and  ending  work. 

In  the  second  place,  labor  resembles  a  perishable  com- 
modity which  the  seller  is  likely  to  be  obliged  to  dispose 
Labor  of  in  a  forced  sale.     The  hired  laborer  corn- 

perishable*  nionly  has  small  reserve  funds  upon  which 
commodity.  ne  can  depend  for  support,  and  is  obliged  to 
sell  his  commodity  at  once  for  whatever  price  may  be 
secured.1  "  The  seller  of  any  other  goods,  by  the  very 
fact  that  he  has  them  to  sell,  has  some  capital  upon 
which  he  can  live  while  he  is  trying  to  make  a  satisfac- 
tory contract."  Even  if  the  goods  are  perishable,  the 
seller  has  his  labor  to  fall  back  upon  as  a  means  of 
support,  while  the  laborer  has  merely  his  labor  between 
him  and  starvation.  Since  the  individual  laborer  is 
normally  in  the  position  of  a  man  obliged  to  make  a 
forced  sale,  he  is  at  a  disadvantage  in  making  the  labor 

1  Moreover,  tho  laborer  who  loses  a  single  day's  employment  is  usually 
tillable  ever  to  recover  that  lost  opportunity.  This  is  often  true  of  capital, 
however,  so  that  this  peculiarity  is  not  confined  altogether  to  labor. 


THE  LABOR  CONTRACT.  435 

contract.  Furthermore,  poverty,  and  sometimes  igno- 
rance, may  prevent  him  from  seeking  the  most  favor- 
able markets.  A  laborer,  especially  if  he  has  a  family, 
finds  it  difficult  to  take  his  commodity,  labor,  to  distant 
markets  where  wages  are  higher. 

A  third  peculiarity  is  connected  with  the  one  first 
mentioned.  The  supply  of  labor  changes  very  slowly, 
and  only  through  changes  in  the  number  of  The  supply  of 
laborers.  The  supply  of  other  commodities  inapecuiiar 
can  be  decreased  by  stopping  production.  mjUmer- 
But  it  is  far  less  easy  to  decrease  the  number  of  la- 
borers when  falling  prices  lead  to  a  partial  suspension 
of  productive  industry,  and  throw  many  men  out  of  em- 
ployment. When  a  decreased  demand  for  labor  causes 
both  low  wages  and  lack  of  employment,  then  large 
numbers  of  unemployed  laborers  press  into  the  market 
and  bid  for  work.  Thus  a  decreased  demand  may  bring 
an  increased  supply  of  labor  into  the  market.  On  the 
other  hand,  when  demand  begins  to  increase  after  a 
period  of  hard  times  and  low  wages,  a  "  reserve  army  " 
of  certain  unemployed  laborers,  "  which  the  poor-houses 
at  the  expense  of  the  whole  population  had  supported 
...  as  long  as  dullness  in  the  business  continued," 
presses  into  the  labor  market  and  increases  the  supply. 
The  price  of  labor  cannot  rise  greatly  as  demand 
increases  until  this  army  of  unemployed  has  been  taken 
back  into  the  ranks  of  industry. 

§  295.  Although  in  theory  the  labor  contract  is  a 
voluntary  agreement  freely  entered  into  by  employer 
and  laborer,  the  economist  finds  reasons  for  believing 


436  PRINCIPLES  OF  ECONOMICS. 

that   this   freedom  is   often    more  nominal   than   real. 

He  finds  that  the  peculiarities  of  the  commodity,  labor, 

are  such  that  the  individual  seller  is  likely 

real  freedom    ^°  ^e  at  a  disadvantage    as  compared  with 

in  the  labor     the  buyer,  so  that  there  may  be  no  real  free- 
contract. 

dom  or  equality  in  contracts  for  the  sale  of 

labor.  An  extreme  instance  of  this  is  found  in  the  case 
of  a  demand  made  that  certain  English  mines  should  be 
inspected  in  order  to  prevent  the  recurrence  of  terrible 
accidents.  The  representative  of  the  mine  owners 
asked,  "  Is  it  not  at  the  pleasure  of  the  miners  whether 
they  go  into  the  mines  or  not  ?  "  "  Certainly,"  was  the 
answer  of  the  witness,  "  but  it  is  not  at  their  pleasure 
not  to  starve  if  they  do  not  go  into  the  mines."  When 
laborers  have  to  make  a  forced  sale  of  their  labor,  their 
freedom  of  contract  is  more  nominal  than  real.  When 
women  and  children  stand  individually  before  the  man- 
ager of  hundreds  of  thousands  of  capital,  it  is  possible 
that  there  may  be  little  freedom  and  less  equality  in  the 
contract  by  which  they  sell  their  services.  The  public 
has  become  dimly  conscious  that  between  two  parties  of 
such  unequal  knowledge,  resources,  and  strength  as  a 
single  laborer  and  the  employer  of  a  hundred  workmen, 
the  wage  contract  cannot  be  entirely  equal  and  free. 
As  a  matter  of  fact,  the  character  of  the  contract  has 
been  appreciably  altered  in  several  directions,  in  order 
to  secure  greater  equality  of  conditions  between  the  con- 
tracting parties.  In  legislation  and  in  actual  practice 
alike  we  have  realized  that  "  there  is  no  greater  in- 
equality than  the  equal  treatment  of  unequals." 


LABOR  LAWS.  437 

II    Labor  Laws  and  The  Labor  Contract. 

§  296.    When  the  Industrial  Revolution  necessitated 
the  repeal  of  the  old  regulations  by  which  English  in- 
dustry had  been  restricted,  employers   and   Restriction  of 
individual  laborers  were  left  free  to  settle  f»e ^ con" 

tract  by 

their  mutual  relations  by  a  labor  contract  legislation, 
that  was  legally  free.  But  such  unrestricted  freedom  of 
contract  soon  produced  some  of  the  most  terrible  effects 
recorded  in  economic  history.  Women  and  children 
were  forced  to  work  in  factories  and  mines  under  condi- 
tions that  proved  destructive  of  body  and  soul.  Hours 
of  labor  were  prolonged  beyond  the  most  extreme 
powers  of  human  endurance,  and  no  care  was  taken  to 
protect  the  operatives  from  the  most  dangerous  acci- 
dents. In  1802  Parliament  passed  the  first  of  a  series 
of  Factory  Acts,  which  gradually  restricted  the  freedom 
of  the  labor  contract.  These  laws  were  consolidated 
and  systematized  in  1878,  and  have  been  extended  since 
that  date.  They  have  restricted  the  hours  and  condi- 
tions of  employment  of  women  and  children,  prohibiting 
the  employment  of  children  under  a  certain  age,  and 
preventing  both  women  and  children  from  contracting 
to  work  under  improper  conditions.  Suitable  ventila- 
tion and  sanitation  of  factories  have  been  required,  and 
employees  have  been  protected  to  some  extent  from 
injury  by  dangerous  machinery.  These  laws  applied  at 
first  only  to  women  and  children  directly,  not  to  adult 
males.  At  the  present  day  there  is  less  interference 
with  labor  contracts  made  by  men.     Yet  acts  prohibit- 


438  PRINCIPLES   OF  ECONOMICS. 

ing  lt  truck"  payments,1  regulating  the  payment  of  sea- 
men's and  miners'  wages,  and  the  employment  of  all 
workers  in  certain  dangerous  trades,  have  seriously  re- 
stricted labor  contracts  of  adult  males. 

In  the  United  States  there  has  been,  on  the  whole, 

less  restriction  of  the  labor  contract.     Still  many  states, 

particularly  in  the  Northeast,  where   man- 

tioninthe       ufactures  are  further  developed,  have  passed 

united  states.  ^^  ac^     ^Q  have   laws  requiring  proper 

sanitation,  ventilation,  and  protection  of  employees  from 
bodily  injury.  "  Truck "  payments  have  often  been 
prohibited.  The  employment  of  children  under  a  suit- 
able age  has  been  prevented  in  some  cases,  while  the 
hours  of  employment  of  women  and  children  have  been 
limited  to  eight  or  ten  in  certain  states.  In  this  move- 
ment Massachusetts  has  taken  the  lead. 

§  297.     The  student  should  be  reminded,  first  of  all, 

that  many  of  the  evils  at  which  these  laws  are  directed 

General  con-     existed  before  the  present  era  of  capitalistic 

S^rST   Production.      The    growth    of    the  factory 

ive  legislation,  system  served  partly  to  bring  them  to  light, 

although  it  certainly  did  a  great  deal  to  intensify  some  of 

them.     It  will  be  seen  that  the  fewest  regulations  have 

been  placed  upon  labor  contracts  made  by  adult  males. 

This  has  been  because  men  have  been  considered  to  be 

better  able  to  make  equal    contracts    with    employers, 

while  women  and  children  have  been  thought  to  need 

1  "Truck"  payments  are  made  in  commodities  supplied  usually  by 
stores  kept  by  employers.  They  have  of  ten  been  resorted  to  as  a  means 
of  robbing  laborers  by  charging  exorbitant  prices  that  virtually  reduced 
the  real  wages  received. 


LABOR  LAWS.  439 

more  protection.  These  restrictions  have  been  based 
upon  the  principle  that  wage-earners  are  not  able  to 
contract  with  their  employers  on  entirely  equal  terms 
concerning  those  conditions  of  employment  that  re- 
strictive laws  have  sought  to  regulate.  As  a  matter 
of  fact,  we  must  admit  that  the  nominal  freedom  of 
the  labor  contract  has  been  decidedly  abridged  as  a 
result  of  this  legislation. 

In  this  country  the  courts  have  often  declared  these 
labor  laws  to  be  unconstitutional,  sometimes  upon  the 
ground   that  they  have  infringed  upon  the    Varyingde. 
right  of  free  contract.     But  there  has  been    cisiousof 

.....  „     the  courts. 

a  lack  of  agreement  in  the  decisions  of 
the  courts  of  the  various  states.  Some  courts  uphold 
laws  that  others  have  declared  unconstitutional,  and 
judges  in  different  states  have  declared  the  same  laws 
unconstitutional  on  totally  different  grounds.  Only  a 
part  of  these  conflicting  opinions  can  be  explained  by 
differences  in  state  constitutions,  and  the  layman  is 
rather  driven  to  the  conclusion  that  these  particular 
questions  of  judicial  interpretation  depend  largely  upon 
latitude  and  longitude.  In  the  long  run  it  seems  proba- 
ble that  the  courts  will  uphold  as  much  of  this  legis- 
lation restricting  the  labor  contract  as  proves  to  be 
necessary  to  obviate  evil  results  that  are  seen  to  occur 
from  the  practical  inequality  of  the  individual  laborer 
and  employer.  Here,  as  in  other  cases,  the  courts 
will  find  ways  by  which  they  can  uphold  the  consti- 
tutionality of  legislation  that  experience  shows  to  be 
necessary. 


440  PRINCIPLES   OF  ECONOMICS. 

III.    Labor  Organizations  and  the  Labor  Contract. 

§  298.    Modern  labor  organizations  are  combinations 

of  hired  laborers.     They  have  developed  naturally  out 

„     ,  of  the  sharp  separation  of  the  laboring  and 

Development  x        l  ° 

of  labor  employing  classes   caused  by  modern   capi- 

talistic production.  As  the  distance  between 
the  employer  and  the  hired  worker  widened,  it  was  in- 
evitable that  laborers  should  realize  the  need  of  combin- 
ing to  protect  and  advance  their  interests  as  a  class.  In 
England  the  growth  of  labor  organizations  was  more 
rapid  than  in  this  country,  and  the  English  trade  unions 
are  much  further  developed  than  the  American. 

The  earlier  organizations,  or  trades  unions,  were  com- 
posed chiefly  of  skilled  workmen,  and  were  organized 
in  separate  trades  or  crafts.     Thev  seldom 

Two  types  l  J 

of  labor  acted  together,  and  had  little  sympathy  for 

organizations.  -■  i  -n     i  1   1  i 

unorganized  or  unskilled  laborers  as  a  class ; 
but  sought  rather  to  further  their  own  immediate  inter- 
ests. The  more  recent  organizations  are  represented  in 
this  country  chiefly  by  the  Knights  of  Labor,  and  in  Eng- 
land by  the  "  new  trade  unionism."  They  seek  to  unite 
all  hired  workers,  skilled  or  unskilled,  and  to  improve 
the  condition  of  the  entire  class  of  wage-earners.  Per- 
haps they  show,  also,  more  of  a  disposition  to  institute 
political  movements  in  behalf  of  their  class.  More 
recently  still,  in  this  country,  the  trades  unions  and 
Knights  of  Labor  have  copied  each  other's  policy  to 
some  extent.  The  trades  unions  have  formed  central 
labor  unions  in  cities,  in  which  unions  of  different  crafts 


LABOR  ORGANIZATIONS.        ■  441 

liavc  joined  in  common  action.  Then  they  have  estab- 
lished the  American  Federation  of  Labor,  a  national 
combination  of  trades  unions.  Meanwhile  the  Knights 
of  Labor  have  formed  district  assemblies  composed  of 
^ laborers  organized  by  separate  crafts.  The  American 
Federation  of  Labor  and  the  Knights  of  Labor  have  not 
as  a  rule  worked  in  harmony.  The  number  of  organ- 
ized laborers  in  the  entire  country  is  seldom  estimated 
at  less  than  one  million. 

§  299.  The  objects  of  labor  organizations  may  be 
classified  in  the  following  manner: —  Objectsof 

1.  By    regular    assessments    upon    their    labor  organ- 

J  &  x  izations. 

members    they    raise    large    sums    for    the 

purposes  of  the  'associations.  These  funds  often  are 
employed  in  insurance  and  benefit  schemes,  by  which 
sick,  injured,  or  unemployed  members  are  assisted.  In 
1893  it  appeared  that  682  English  trades  unions  dis- 
bursed 110,928,076,  of  which  sum  fully  one  half  was 
employed  in  this  manner.  The  possession  of  this  prop- 
erty makes  these  unions  more  conservative  and  more 
responsible  organizations. 

2.  They  aim  to  educate  laborers  in  various  ways,  and 
to  promote  culture  and  social  intercourse  among  their 
members.  In  their  debates  and  the  administration  of 
their  affairs,  members  often  secure  valuable  training. 

3.  They  frequently  encourage  cooperative  enterprises 
among  their  members,  and  desire  to  promote  self- 
employment. 

4.  They  sometimes  enter  into  political  movements,  and 
thus  influence  much  labor  legislation  in  their  favor. 


442  PRINCIPLES   OF  ECONOMICS. 

5.  Finally,  they  aim  to  secure  practical  as  well  as 
nominal  freedom  and  equality  in  the  labor  contract. 
For  this  purpose  they  seek  to  control  the  supply  of 
labor  in  two  ways :  First,  they  assist  laborers  to  move 
to  less  crowded  labor  markets  when  the  supply  becomes 
excessive.  Second,  they  may  try  to  control  the  future 
supply  of  labor  in  particular  crafts  by  restricting  the 
number  of  apprentices  admitted  into  each  trade.  More 
than  this,  they  seek  to  secure  collective  bargaining 
with  employers.  This  subject  requires  more  detailed 
treatment. 

§  300.  Perhaps  the  most  important  single  feature  of 
labor  organizations  is  their  effort  to  substitute  collective 
couective  bargaining  between  employers  and  associa- 
bargaifling.  tions  of  employees  for  contracts  between 
employers  and  individual  laborers.  They  believe  that 
a  single  worker  is  usually  at  a  disadvantage  in  making 
a  contract  with  his  employer,  while  an  organization  of 
laborers  can  drive  a  more  equal  bargain.  Experience 
has  shown  that  this  is  so.  Organized  laborers  can  refuse 
to  make  a  contract  on  terms  deemed  unjust,  because 
they  can  fall  back  upon  the  funds  of  their  unions  in 
case  they  lose  an  opportunity  to  work.  This  makes  it 
less  necessary  to  sell  their  labor  at  a  forced  sale,  for  it 
enables  them  to  hold  out  for  better  terms.  Secondly, 
labor  organizations  can  prevent  their  own  members  from 
taking  the  places  of  those  who  refuse  to  accept  the 
terms  offered  by  employers,  while  often  they  dissuade 
outside  laborers  from  doing  so.  This  has  compelled 
employers  to  offer  better  terms. 


LABOR  ORGANIZATIONS.  443 

Organized  laborers  can,  therefore,  utilize  the  strike  as 
a  means  of  securing  better  terms.     Manifestly,  strikes 
are  evil  in  themselves,  since  they  cause  loss    strikes  and 
both  to  employers  and  laborers;  while  they    b°ycott8- 
arouse   bitter   contests    of    strength,   and    often   incon- 
venience the  public.     They  may  be  defended  only  when 
they  are  the  sole  alternative  to  yielding  to  unjust  terms 
offered  by  employers.     Many  strikes  have  been  unwise 
and  unjust ;  many  others  have  been   thoroughly  justi- 
fiable.    They  are   most  likely  to  succeed  in  prosperous 
times,  "  upon  a  rising  market."     Sometimes,  if  employ- 
ers have  engaged  to  complete   large  amounts  of   work 
within  a  certain   time,  the   laborers   may  force  a  con- 
tract in  which  the  employers  are  at  a  positive  disad- 
vantage.    From  January  1,  1881,  to  June  30,  1894,  it 
appears  that  14,390  strikes,  involving  69,167  establish- 
ments, occurred  in  the  United  States.    In  44.49  per  cent 
of  these  establishments  the  strikes  succeeded,  in  11.25 
per  cent  they  were  partially  successful,  while  in  44.23 
per  cent  they  failed.1     Even  when  strikes  fail,  the  knowl- 
edge that  the  employees  are  able  to  strike  again  may 
secure  more   favorable  terms   to  laborers,  without  the 
necessity  for  future  occurrences  of  this  sort.     The  boy- 
cott is  a  second  weapon.     It  is  "  an  organized  attempt 
to  coerce  a  person  into  compliance  with  any  demand, 
through  a  combination  pledged  to  abstain,  and  pledged 
further  to  compel  others  to  abstain,  from  having  social 
intercourse  with  him  or  to  trade  with  him."     Boycotts 

1  Bulletin  of  Department   of  Labor,  i.   10,  20.      Washington,   Nov 
1895. 


444  PRINCIPLES   OF  ECONOMICS. 

are  more  objectionable  than  strikes,  because  they  are 
more  likely  to  cause  interference  with  the  rights  of  per- 
sons who  are  not  directly  connected  with  the  original 
dispute.  Yet  if  producers  can  be  induced  to  place  union 
labels  upon  their  goods  voluntarily,  there  is  no  reason 
why  laborers,  or  any  other  consumers,  should  not  pur- 
chase such  products  by  preference. 

Mr.  Stimson  thinks  that  strikes,  in  themselves,  have 
never   been    illegal   in   the    United    States.1      Laborers 

have   had   the    right    to   combine   to   raise 
The  legality  ° 

of  strikes  and  wages  by  lawful  means.  But  when  they 
have  combined  to  perform  illegal  acts,  or 
when  the  primary  motive  of  their  combination  has  been 
to  inflict  personal  injury,  then  they  have  been  held 
guilty  of  conspiracy.  In  the  case  of  the  boycott,  the 
courts  have  been  inclined  to  hold  that  the  primary  pur- 
pose is  to  interfere  with  the  business  of  others  rather 
than  to  raise  wages.  Probably  most  people  will  agree 
that  "  the  boycott  is  not  the  remedy  to  adjust  differences 
between  capital  and  labor,"  at  least  when  enforced  by 
coercion.  In  general  it  can  be  said  that  the  law  now 
leaves  laborers  free  to  combine  to  enforce  their  demands 
by  any  methods  that  do  not  conflict  with  the  rights  of 
others.  Those  who  criticise  labor  organizations  so 
freely  for  their  use  of  strikes  and  boycotts,  commonly 
overlook  the  fact  that  other  classes  of  society  use  pre 


) 


1  In  England  the  case  was  different.  Early  in  this  century  legislation 
and  the  courts  were  opposed  to  the  simplest  combinations  to  raise  wa<res. 
For  this  offence  six  laborers  were  transported  into  penal  servitude  as  late 
as  1 834. 


LABOR  ORGANIZATIONS.  44o 

ciscly  the  same  weapons.  Between  January  1,  1881, 
and  June  30,  1894,  there  were  lockouts  in  G,067  estab- 
lislmients  in  the  United  States.  In  these  cases,  em- 
ployers, either  individually  or  in  combination,  locked 
out  366,690  employees  in  order  to  coerce  them  into 
compliance  with  dictated  conditions.  The  boycott  has 
long  been  used  by  many  people.  "  The  abolitionists 
boycotted  slave-made  products  ;  the  temperance  people 
have  used  the  same  method  to  repress  the  liquor  nui- 
sance ;  the  pulpit  has  tried  hard  to  boycott  Sunday  news- 
papers; and  recently  there  has  been  established  in  the 
city  of  New  York  a  society,  consisting  of  women  occu- 
pying excellent  social  positions,  pledged  not  to  purchase 
goods  of  houses  which  do  not  furnish  proper  conven- 
iences for  their  saleswomen.  Railroad  companies  have 
boycotted  their  men  time  and  time  again ;  working 
people  have  boycotted  railroads,  dealers,  and  manu- 
facturers ;  railroads  combine  and  boycott  other  rail- 
roads ;  and  so  the  method  has  grown  to  be  a  familiar 
one  with  all  classes,  and  one  that  is'  used  in  various 
ways."  1  No  device  of  industrial  warfare  is  more  cruel 
than  the  form  of  boycott  known  as  the  "  blacklist." 

§  301.  Manifestly,  the  labor  contract  is  greatly  modi- 
fied whenever  combinations  of  laborers  are  able  to 
induce  or  coerce  employers  into  making  Labor  organi- 
terms  primarily  with  the  labor  unions,  ^^mZ 
rather  than  with  the  individual  employees,  labor  contract. 
This  is  a  matter  to  which  employers  commonlv  offer 
serious  objections.     When  labor  organizations  adopt  a 

l  Wright,  Industrial  Evolution  of  the  United  States,  319. 


446  PRINCIPLES   OF  ECONOMICS. 

conservative  policy,  and  choose  men  of  ability,  integrity, 
and  character  to  represent  them,  employers  are  much 
more  willing  to  treat  with  representatives  of  unions. 
Many  capitalists  have  recognized  the  advantage  of 
dealing  with  a  responsible,  conservative  union,  rather 
than  with  irresponsible  workingmen.  In  England, 
where  trades  unions  are  better  organized  and  more 
wisely  managed,  employers  show  much  less  disinclina 
tion  to  deal  with  them.  Many  careful  thinkers  and 
practical  business  men  will  assent  to  Mr.  Stimson's 
opinion  that  "  collective  bargaining  between  associations 
legally  organized  and  personally  responsible  on  both 
sides  .  .  .  holds  the  future  of  the  peace  of  labor." 
When  American  labor  organizations  become  more  will- 
ing to  assume  responsibility  for  the  acquiescence  of 
their  members  in  the  agreements  made  by  the  unions,1 
and  when  they  more  generally  place  their  best  and 
wisest  men  in  control  of  their  affairs,  employers  will 
not  long  refuse  to  deal  with  them.  Some  zealous 
advisers  of  laborers  urge  upon  them  that  they  lose 
their  personal  independence  by  entering  a  union,  by 
whose  rules  they  must  thenceforth  be  bound.  The 
student  will  have  no  difficulty,  however,  in  recognizing 
that  wisely  managed  labor  unions  can  increase  the 
practical  freedom  of  contract  enjoyed  by  the  employee, 
even  if  his  nominal  freedom  is  restricted  by  the  rules  of 
the  association. 

1  Tho  English  Onions  accomplish  this  by  their  better  discipline  and 
leadership,  and  especially  by  means  <>f  their  benefit  funds,  in  which  a  dis- 
obedient member  loses  bis  .share  if  he  leaves  the  association. 


LABOR   ORGANIZATIONS.  447 

§  302.  Labor  organizations  have  often  made  mistakes 

and  pursued  short-sighted  policies,  as  willing  critics  are 

fond  of  pointing  out.     Some    of   the   criti- 

r  °  Other  aspects 

cisms  commonly  passed  upon  them  need  to  of  labor 

.  ,         ,  organizations. 

be  considered. 

1.  They  are  called  monopolies,  and  this  is  often  true. 
For  unions  frequently  seek  to  limit  the  number  of 
apprentices  in  particular  crafts,  and  to  limit  the  supply 
of  labor.  Such  measures  may  injure  laborers  in  other 
trades  by  causing  an  oversupply  there.  These  regula- 
tions may  be  considered  legitimate  methods  of  industrial 
warfare  whenever  employers  seek  to  get  all  their  work 
done  by  apprentices,  by  discharging  a  workman  as  sooi? 
as  he  completes  his  apprenticeship,  or  when  they  try  to 
keep  large  numbers  of  unemployed  workmen  in  reserve 
in  order  to  keep  wages  down. 

2.  Labor  unions  sometimes  limit  the  amount  of  work 
that  their  members  may  perform  in  a  day.  This  is  done 
with  a  view  to  making  work  for  a  larger  number  of 
laborers.  Such  action  is  very  short-sighted,  because  a 
limitation  of  production  simply  decreases  the  social 
income  available  for  all  persons,  laborers  included.  It 
may  be  compared  with  the  action  of  monopolies  in 
decreasing  production,  in  order  to  cause  scarcity  and 
raise  prices. 

3.  The  members  of  labor  organizations  often  treat 
non-union  men  harshly  and  even  cruelly,  and  interfere 
with  the  undoubted  rights  of  laborers  who  are  not  mem- 
bers of  unions.  It  is  natural  that  members  of  unions 
should  feel  resentment  at  outsiders  when  they  play  into 


448  PRINCIPLES   OF  ECONOMICS. 

the  hands  of  employers,  but  this  does  not  justify  inter- 
ference with  the  rights  of  persons  that  do  not  desire  to 
join  labor  organizations.  On  the  other  hand,  employers 
frequently  discriminate  against  members  of  labor  unions, 
and  have  combined  to  boycott  them  on  a  large  scale.  A 
favorite  method  of  breaking  down  labor  organizations  is 
to  discharge  the  men  who  take  prominent  parts  in  them. 
Labor  organizations  act  within  their  undoubted  rights 
when  they  resist  by  lawful  means  the  replacement  of 
their  leading  members  by  non-union  men. 

4.  Finally,  it  is  said  that  labor  organizations  are  based 
upon  the  principle  of  strife  and  cause  industrial  warfare. 
"  In  the  minds  of  a  large  section  of  the  public,  labor 
unions  are  chiefly  associated  with  strikes.  It  is  believed 
by  many  who  ought  to  know  better  that  such  organiza- 
tions exist  for  the  purpose  of  striking,  and  that  if  the 
organizations  were  suppressed,  industrial  peace  would  be 
secured."  l  The  truth  is  that  labor  organizations  exist 
primarily  to  equalize  the  terms  of  the  labor  contract. 
In  the  early  history  of  any  union  the  strike  has  been 
used  frequently  as  a  means  of  accomplishing  this  end. 
In  the  long  run,  however,  labor  organizations  grow  more 
conservative  and  less  disposed  to  strike,  while  their 
power  and  influence  increase  so  that  employers  are  more 
inclined  to  offer  fair  terms,  thus  making  strikes  unneces- 
sary. So  long  as  the  labor  contract  depends  rather  upon 
the  relative  strength  of  the  contracting  parties  than 
upon  considerations  of  exact  justice,  there  is  bound  to 
be  more  or  less  strife  between  laborers  and  capitalists. 

1  Hadlky,  Economics,  353. 


RELATION  OF  LABORERS  TO   THE  PRODUCT.     449 

This  is  not  an  entirely  satisfactory  condition  of  affairs, 
but  only  half  of  the  responsibility  for  it  rests  upon  the 
laborers.  In  the  future,  collective  bargaining  may  re- 
duce this  strife  to  a  minimum. 

IV.    The  Unfavorable  Relation  of  Laborers  to  the  Prod- 
uct of  their  Labor. 

§  303.  Experience  has  shown  that  laborers  receiving 
time  wages  are  likely  to  have  little  interest  in  turning 
out   a   large    product,   except   what   comes 

01  l  Time  wages 

from  the  knowledge  that  they  will  lose  their    and  piece 

positions  if  they  are  too  inefficient.  Piece  wag  s 
wages  may  give  the  employee  a  greater  incentive  to  dili- 
gent work.  But  they  have  often  been  used  by  employers 
as  a  means  of  getting  employees  to  do  more  work,  and 
then  the  rate  of  wages  per  piece  has  been  reduced ;  so 
that  laborers  have  had  to  do  more  work  in  order  to  se- 
cure the  same  wages  that  they  formerly  received  under  a 
time  wage.  Such  experiences  have  inclined  workers  to 
look  with  suspicion  upon  the  proposal  to  adopt  piece 
wages,  and  have  led  them  to  refrain  from  increasing 
their  efficiency  under  the  system.  It  is  not  too  much  to 
say  that,  under  the  average  conditions  of  time  or  piece 
wages, laborers  do  only  seventy  or  ninety  percent  of  the 
work  that  they  could  reasonably  do,  if  furnished  with  a 
sufficient  incentive. 

§  304.    Some  employers  have  realized  that  their  labor- 
ers did  not  work  up  to  their  highest  efficiency     Pr0&ressive 
under  the  ordinary  methods  of  paying  wages,    waffes- 
and  have  adopted  various  systems  of  progressive  wages. 


450  PRINCIPLES  OF  ECONOMICS. 

Under  these  methods  the  employees  have  been  guaran- 
teed a  minimum  time  wage  ;  and  have  been  offered  a 
premium  for  attaining  more  than  a  certain  degree  of 
efficiency,  —  that  is,  for  exceeding  a  certain  amount  of 
work  each  hour  or  day.  It  is  impossible  to  present  here 
the  details  of  these  experiments  with  progressive  wages ; 
but,  when  they  have  been  introduced  in  good  faith  by 
employers,  it  has  been  found  that  the  average  product  of 
each  worker  has  increased  largely,  occasionally  as  much 
as  eighty  or  one  hundred  per  cent. 

§  305.    Progressive  wages  have  served  to  increase  the 
laborer's  efficiency,  but  they  have  not  avoided  entirely 

Profit         disputes  between  employers  and  employees. 

sharing.  Profit  sharing  is  a  plan  for  giving  the  laborer 
an  inducement  to  work  efficiently,  and  for  securing 
greater  harmony  of  interest  between  employers  and 
workmen.  Under  its  provisions  hired  laborers  are  given 
shares  in  the  profits  of  the  business,  the  share  of  each 
workman  being  determined  beforehand  upon  some  equi- 
table basis.  The  purpose  of  such  an  arrangement  is  to 
induce  laborers  to  increase  their  output,  improve  its 
quality,  and  thus  contribute  toward  the  creation  of  extra 
profits  in  which  they  may  share.  In  some  instances  ex- 
periments in  profit  sharing  have  had  this  result,  and 
have  proved  at  least  moderately  successful.  But  in 
many  cases  they  have  proved  unsuccessful,  and  have 
been  given  up.  A  common  reason  for  such  failure  is 
that  there  have  been  very  small  profits  to  divide,  or  even 
no  profits  at  all  ;  so  that  laborers  have  had  little  interest 
in  the  scheme,  and  have  not  hesitated  to  strike  if  there 


RELATION  OF  LABORERS  TO  THE  PRODUCT.    4ol 

was  any  prospect  of  immediate  advantage  resulting  from 
such  a  course. 

Experience  has  shown  that  profit  sharing  does  not  do 
away  with  strikes,  although  in  some  cases  it  has  pro- 
moted a  better  understanding  and  feeling 

°  fo        Merits 

between  employer  and  employed.  Concern-  of  profit 
ing  its  merits  as  a  plan  for  distribution,  the  s  g' 
following  points  may  be  noticed.  If  the  share  of  profits 
received  by  laborers  is  created  by  increased  efficiency 
and  exertion  on  their  part,  then  it  may  be  as  favorable 
to  efficient  production  as  systems  of  progressive  wages, 
but  hardly  more  so.  Unfortunately,  however,  the  profits 
actually  realized  by  a  business  depend  so  much  upon 
good  management  by  the  employer  that  their  amount 
may  not  vary  proportionately  with  the  increased  zeal  and 
efficiency  of  the  workers.  Laborers  may  increase  their 
product  ten  per  cent,  but  bad  business  management  may 
result  in  an  actual  loss  on  the  sales.  In  such  a  case 
profit  sharing  may  be  unjust  to  the  employee.  On  the 
other  hand,  if  the  profits  received  by  the  laborers  are 
merely  a  gratuity  from  the  employer,  then  the  system  is 
unfair  to  him.  For  laborers  would  be  made  to  share  in 
any  profits  earned  by  the  business,  while  they  would 
bear  no  share  of  the  losses.  In  conclusion  it  may  be 
said  that  profit  sharing  has  accomplished  less  than  its 
more  ardent  supporters  have  expected. 

§  300.   Cooperation,  in  the  technical    sense,  has  had 
two  distinct  forms.     First,  consumers  have 
combined  to  conduct  the  exchange  of  prod- 
ucts, that  is,  wholesale  and  retail  trade,  in  order  to  save 


452  PRINCIPLES   OF  ECONOMICS. 

the  charges  made  by  middlemen.  In  England  many 
successful  cooperative  stores  have  been  established,  but 
in  this  country  they  have  been  less  numerous  and  impor- 
tant. To  this  form  of  cooperation  the  name  consumers' 
or  distributive  cooperation  has  been  given.  The  second 
form  is  productive  cooperation.  Workmen  have  com- 
bined to  establish  and  conduct  productive  enterprises 
upon  their  own  account.  They  may  contribute  nearly 
all  the  capital,  or  may  borrow  a  part ;  but  they  become 
their  own  employers  and  form  a  collective  undertaking. 
Productive  cooperation  has  had  little  success  in  England, 
but  rather  more  in  France ;  while  a  few  such  enterprises 
have  succeeded  in  the  United  States. 

Manifestly,  productive  cooperation  is  a  radical  change 
from  the  present  organization   and   supervision  of  in- 
dustry by  individual  entrepreneurs  employ- 
The  merits  J      J  l  l      J 

of  productive  ing  large  numbers  of  hired  laborers.  In 
coopera  on.  gome  few  cases  where  it  has  succeeded,  its 
advantages  have  been  very  great.  It  has  made  impos- 
sible strife  between  employing  and  laboring  classes. 
Self-employed  workers  have  shown  activity  and  zeal  in 
their  labor  that  hired  laborers  do  not  exhibit.  It  has 
encouraged  frugality,  since  it  furnishes  a  strong  induce- 
ment to  saving.  Finally,  the  responsibility  and  experi- 
ence of  proprietorship  have  had  an  excellent  moral 
influence  upon  the  cob'perators. 

In  cooperative  production  the  place  of  the  entrepre- 
neur is  taken  by  a  manager  elected  by  the  workmen. 
Now,  it  is  all-important  for  the  success  of  the  enterprise 
that  the  manager  shall  have  the  same  skill  that  indi- 


CONCILIATION  AND  ARBITRATION.  453 

vidual  entrepreneurs  possess.  If  lie  fails  to  show  sufficient 
ability,  the  business  will  prove  a  failure.  Cooperators 
arc  not  inclined  to  pay  enough  to  keep  the  Difficulty  of 
most  able  men  in  their  service,  so  that  if  a  cooperative 
successful  manager  is  found  they  are  likely  production, 
to  lose  him.  Moreover,  differences  of  opinion  among 
cooperators  are  likely  to  cause  dissensions  that  lead  to 
divided  counsels  and  inefficient  management.  Coopera- 
tive production  has  succeeded  best  when  the  business 
has  not  been  of  a  complex  character,  when  skillful  man- 
agement has  counted  for  less,  and  efficient  workman- 
ship has  availed  more.  Finally,  laborers  have  seldom 
had  sufficient  capital  and  credit  to  enable  them  to  secure 
the  means  of  establishing  large  enterprises.  These 
difficulties  have  generally  circumscribed  narrowly  the 
field  where  cooperative  production  could  prove  a  success. 
The  conclusion  seems  warranted  that  cooperation  is  an 
ideal  system  when  possible,  but  that  the  difficulties  at- 
tending it  are  so  great  as  to  make  it  impossible  for  us 
to  expect  very  much  from  it  in  any  immediate  future. 
The  entrepreneur  will  continue  to  organize  and  direct 
the  large  majority  of  business  enterprises,  for  he  seems 
able  to  insure  to  society  the  most  efficient  direction  of 
its  productive  forces. 

V.    Conciliation  and  Arbitration. 

§  307.  In  contracts  for  the  sale  of  ordinary  commoai- 
tics,  disagreements  between  bargainers  seldom  lead  to 
conflicts  between  the  contracting  parties.  But  the  labor 
contract  is  peculiar  in  that  the  person  of  the  laborer 


454  PRINCIPLES  OF  ECONOMICS. 

and  his  work  are  inseparable.  Human  interests  are 
involved  in  an  especial  degree  in  changes  of  the  supply 
The  labor  of  labor,  and  in  all  the  conditions  of  em- 
industrial  ployment  subsequent  to  the  conclusion  of  an 
warfare.  agreement  between  employers  and  laborers 
on  the  matter  of  wages.  Hence  it  is  easy  for  the  con- 
flict of  interests  to  become  serious  when  differences 
arise  between  the  parties  to  the  labor  contract.  La- 
borers resort  to  strikes  and  boycotts ;  employers  adopt 
the  lockout  and  the  blacklist.  When  such  disputes  oc- 
cur they  are  settled  usually  by  a  trial  of  strength 
between  employer  and  employees ;  and,  since  might, 
not  reason,  is  appealed  to  as  the  usual  arbiter,  conflicts 
between  laborers  and  capitalists  are  justly  described  as 
"  industrial  warfare." 

§  308.  Few  persons  are  satisfied  with  appeals  to  force 
as  the  principal  method  of  adjusting  the  relations  of 
industrial  laborers  and  employers.  One  remedy  for 
conciliation.  fhe  present  unsatisfactory  relation  has  been 
found  in  boards  of  conciliation  voluntarily  established 
in  various  trades.  Employers  and  laborers  in  the  same 
trade  have  selected  representatives  to  form  a  committee, 
or  board,  before  which  all  differences  shall  be  brought 
for  calm  and  fair  consideration  before  they  can  lead  to 
serious  disputes.  When  this  expedient  has  been  fairly 
tried  in  good  faith,  it  has  been  found  that  nearly  all 
disputes  can  be  settled  by  the  boards  to  the  ultimate 
satisfaction  of  both  parties.  Both  employers  and  la- 
borers have  taken  care  to  avoid  mistakes,  and  a  fair 
settlement,  even  of  questions  of  wages,  has  usually  been 


CONCILIATION  AND  ARBITRATION  455 

possible.  Strikes  or  lockouts  have  often  been  avoided 
for  long  periods  of  years.  Voluntary  boards  of  concili- 
ation have  demonstrated  that  it  is  not  impossible  to 
reconcile  conflicting  claims  of  laborers  and  employers 
on  a  basis  of  reason  and  justice,  without  appeals  to 
trials  of  strength,  that  is,  appeals  to  force ;  they  have 
proven  that  most  labor  controversies  are  unnecessary, 
arising  in  misunderstanding  and  distrust,  rather  than 
in  the  desire  of  either  party  to  wrong  the  other ;  while, 
finally,  they  have  shown  that  mutual  respect,  confi- 
dence, and  good-will  may  prevail  between  employers 
and  employed,  in  place  of  the  mutual  distrust,  and  even 
class  hatred,  that  too  often  characterizes  their  relation 
at  present. 

§  309.  When  disagreements  between  employer  and 
employee  lead  to  an  open  rupture,  such  as  a  strike  or 
lockout,  disputes  have  sometimes  been  sub-  Voluntary 
mitted  to  arbitration  by  unprejudiced  judges. 
Sometimes  when  boards  of  conciliation  have  failed  to 
agree  on  a  certain  subject,  it  has  been  submitted  to  the 
decision  of  some  umpire  or  arbitrator.  In  this  country 
several  states  have  established  boards  of  conciliation 
and  arbitration,  which  are  generally  authorized  to  in- 
vestigate any  dispute  between  laborers  and  employers, 
and  to  offer  their  services  in  securing  a  settlement.  In 
Massachusetts  this  method  has  been  found  quite  success- 
ful in  settling  many  disputes ;  but  the  board  has  done  its 
best  work  in  the  field  of  conciliation,  where  it  has  secured 
the  settlement  of  many  questions  that  might  have  led  to 
strikes  and  lockouts.     Arbitration  voluntarily  accepted 


45G  PRINCIPLES   OF  ECONOMICS. 

by  the  parties  to  the  dispute  is  the  wisest  and  most  ad- 
vantageous method  of  settling  differences  when  a  strike 
or  lockout  has  actually  occurred.  But  it  is  altogether 
desirable  to  prevent,  by  conciliation,  the  disturbance  of 
friendly  relations  between  employers  and  laborers. 

§  310.  It  has  been  proposed  to  compel  by  law  the 
adjustment  of  labor  controversies  by  arbitration.  Com- 
compuisory  pulsory  arbitration  of  this  character  presents 
arbitration.  serious  difficulties.  The  first  is  that,  while 
it  is  easy  to  enforce  the  decision  of  the  arbitrators  upon 
the  capitalist,  it  is  generally  impossible  to  compel  the 
laborer  to  abide  by  it  permanently.1  To  remedy  this 
difficulty  it  has  been  proposed  to  have  labor  organiza- 
tions incorporated,  so  that  judgments  can  be  enforced 
against  them.  But  this  proposition  is  not  at  present 
widely  favored  by  laborers.  In  the  second  place,  if 
laborers  could  be  compelled  to  work  at  wages  fixed  by 
arbitration,  it  is  questionable  whether  they  would  render 
willing  service,  and  whether  their  labor  would  not  prove 
as  inefficient  as  slave  or  prison  labor.  Finally,  it  is 
claimed  that  capitalists  would  not  invest  their  capital 
under  any  such  condition  as  compulsory  arbitration  of 
labor  disputes.  This  is  a  favorite  answer  to  any  pro- 
posal for  limiting  the  powers  of  capitalists.  Capital 
must  be  invested,  and  only  a  small  portion  could  flow 
out  of  the  country.     It  is  possible,  however,  that  com- 

1  It  is  easy  to  find  enough  property  belonging  to  the  employer  to  enable 
(lie  judgment  of  the  arbitrators  to  be  enforced  upon  him.     With  laborers 
this  is  seldom  possible,  while  imprisonment  would  probably  be  an  inipos' 
iUr  punishment  for  a  refusal  to  work  under  unsatisfactory  conditions. 


LITERATURE.  457 

pnTsory  arbitration  might  be  enforced  in  an  unjust  man- 
ner that  should  prove  destructive  to  the  interests  of 
employers.  This  would  discourage  the  growth  of  capital 
and  check  the  development  of  industry.  If,  on  the  other 
hand,  compulsory  arbitration  should  be  fairly  adminis- 
tered, there  is  no  reason  to  fear  that  the  capital  of 
society  would  be  impaired.  Most  people  will  agree  that 
compulsory  arbitration  would  be  such  a  serious  limita- 
tion upon  the  labor  contract  that  it  must  be  considered 
undesirable  as  long  as  there  are  other  possible  methods. 


LITERATURE   ON  CHAPTER  XIV. 

General  References  :  Brentano,  The  Relation  of  Labor  to  the 
Law  of  To-day ;  Bulletin  of  the  Department  of  Labor,  Nos.  1  and 
2  ;  Ely,  Outlines  of  Economics,  187-197,  The  Labor  Movement  in 
America;  Gilmax,  Profit  Sharing;  Hadley,  Economics,  336-369, 
104—421  ;  History  of  Cooperation  in  the  United  States;  Hobson, 
Evolution  of  Modern  Capitalism;  Holyoake,  History  of  Coopera- 
tion in  England;  Howell,  Conflicts  of  Labor  and  Capital,  Handy 
Book  of  the  Labor  Laws ;  Jevons,  The  State  in  its  Relation  to 
Labor;  Jones,  Cooperative  Production;  Lowell,  Industrial  Arbi- 
tration and  Conciliation ;  McNeil,  The  Labor  Movement ;  Mill, 
Principles  of  Political  Economy,  Book  IV.  Chap.  7,  Book  11.  Chaps. 
12,  13,  14;  Potter,  Cooperative  Movement  in  Great  Britain  ; 
Price,  Industrial  Peace;  Rae,  Eight  Hours  for  Work  ;  Rogers, 
Worfc  and  Wages,  Chaps.  14  and  18;  Schloss,  Methods  of  Indus- 
trial Remuneration  ;  Stimson,  Labor  in  its  Relation  to  Law,  Hand- 
book of  the  Labor  Law  of  the  United  States;  Taylor,  Profit 
Sharing;  The  Adjustment  of  Wages  to  Efficiency:  Walker,  Polit- 
ical Economy,  375-394,  The  Wages  Question;  Webb,  History  of 
Trade  Unionism  ;  WRIGHT,  Industrial  Evolution  of  the  United 
States.  231-320,  Report  on  Conciliation  and  Arbitration  ;  Lloyd, 
Labor  Copartnership  ;  Webb,  Industrial  Democracy. 


458  PRINCIPLES   OF  ECONOMICS. 


CHAPTER  XV. 

LAND   NATIONALIZATION.      SOCIALISM. 

I.     Land    Nationalization. 

§  311.   About   1870    a    movement   in   favor   of    land 

nationalization  started  in  England.     The  Land  Tenure 

The  English     Reform  Association   advanced  the  proposi- 

SrmAsS-  tion  that  the  State  sll0uld  take  by  taxation 
ciation.  all,  or  nearly  all,  of  the  future  increase  of 

the  rent  of  land.  Present  landowners  were  to  have 
the  option  of  "  relinquishing  their  property  to  the  State, 
at  the  market  value  which  it  might  have  acquired  at  the 
time  when  this  principle  may  be  adopted  by  the  Legis- 
lature." The  Association  claimed  that  its  proposal  was 
just  and  desirable  because  the  growth  of  ground  rent 
(the  economic  rent  of  land  in  the  strictest  sense,  apart 
from  improvements  made  upon  it)  is  due  to  "the  growth 
of  population  and  wealth,"  "  without  any  effort  or  out- 
lay by  the  proprietors." 

§  312.    More  recently,  Mr.  Henry  George  has  started 

an  agitation  in  favor  of  the  seizure  by  the  State,  not 

merely  of  the  future  "unearned  increment  " 

Henry  George 

and  the  single  of  laud  rentals,  but  of  the  entire  economic 

rent   of    land.     He   would   accomplish   this 

tin  I    by  imposing  upon  land  a  single  tax   equal  to  its 


LAND  NATIONALIZATION.  459 

annual  economic  rent ;  that  is,  its  rental  value  apart 
from  all  improvements.  Moreover,  he  has  denied  the 
justice  or  necessity  of  compensating  landowners  by 
allowing  them  to  sell  to  the  State  their  lands  at  the 
market  value.  It  is  evident  that  such  a  plan  is  equiva- 
lent to  national  ownership,  or  nationalization  of  land. 

§  313.  Mr.  George  is  not  a  socialist.  He  believes 
that  men  should  have  the  right  of  property  in  all  prod- 
ucts of  their  labor.     But  he  denies  that  the 

The  arguments 

economic  rent  of  land  is  the  product  of  any  advanced  by 
activity  of  the  landlord,  and  claims  that  it  is       '    orge' 
due  entirely  to  the  growth  of  population,  which  increases 
the  demands  made  upon  the  land,  and  raises  rents.    His 
arguments  depend  upon  this   fundamental   proposition, 
and  we  may  present  them  in  the  following  manner. 

1.  All  social  progress  increases  the  demand  for  land. 
The  law  of  diminishing  returns 1  drives  investments 
of  labor  and  capital  onto  poorer  margins,  and  increases 
rent.  Thus  the  tendency  of  progress  is  to  give  land- 
lords more,  leaving  less  for  all  other  people.  There- 
fore, progress  will  always  cause  poverty  as  long  as  land 
remains  in  the  hands  of  private  owners.  There  are  two 
fallacies  in  this  argument.  First,  all  social  progress 
does  not  increase  the  demands  made  upon  land.  The 
improvements  in  manufactures  of  the  last  century  have 

1  Mr.  George  formally  denies  the  law  of  diminishing  returns  (see 
"Progress  and  Poverty,"  Bk.  II.,  Chaps.  3  and  4).  But  he  undertakes 
to  demonstrate  the  invariable  connection  between  progress  and  poverty 
by  means  of  Ricardo's  law  of  rent,  —  a  law  based  npon  the  assumption 
of  the  law  of  diminishing  returns,  and  meaningless  upon  any  other 
assumption. 


460  PRINCIPLES  OF  ECONOMICS. 

increased  enormously  the  product  secured  from  each 
acre.  Improvements  in  agriculture  constantly  enable 
the  supply  to  be  produced  from  better  grades  of  lands, 
throw  poorer  grades  out  of  use,  and  decrease  rents. 
Improved  means  of  transportation  enable  the  best  grades 
of  lands  in  all  parts  of  the  world  to  be  utilized,  and  they 
have  reduced  rents  on  older  lands.  The  progress  of  the 
last  century  has  notably  increased  rents  only  in  the  case 
of  land  especially  desirable  for  use  in  commerce  and 
transportation,  and  this  mainly  in  large  cities.  The 
second  fallacy  is  that  of  supposing  that,  in  any  case, 
the  demand  for  land  can  increase  indefinitely,  and  can 
throw  most  of  the  product  into  the  hands  of  land- 
lords. The  growth  of  population,  which  is  the  principal 
cause  of  an  increased  demand  for  land,  is  limited  by 
the  desire  of  men  to  maintain  their  standard  of  living, 
or  even  to  raise  it.  Beyond  the  point  set  by  the  standard 
of  living,  population,  and  hence  this  principal  demand 
upon  land,  will  not  increase.1  Our  first  conclusion  was 
that  progress  does  not  necessarily  increase,  on  the  whole, 
the  demands  made  upon  the  land,  although  it  may  enor- 
mously increase  the  demands  made  upon  favored  situa- 
tions. Our  second  conclusion  must  be  that  population, 
hence  the  principal  demand  upon  the  land,  can  never 

1  This  point  is  worked  out  more  fully  in  Ely,  "  Outlines  of  Economics," 
175-176.  Furthermore,  Bohm-Bawbrk  has  called  attention  to  an  equally 
important  fact.  "Just  as  effectually  as  the  claims  of  the  worker  may 
and  do  prevent  cultivation  hcing  extended  to  a  point  at  which  labor  does 
not  ohtain  even  its  own  costs  of  subsistence,  may  the  claims  of  capita] 
prevent  an  excessive  extension  of  the  limits  of  cultivation,  and  actually 
do  prevent  it."     See  "  Capital  and  Interest,"  93-94. 


LAND  NATIONALIZATION.  461 

increase  beyond  the  point  set  by  the  claims  of  capital 
and  by  the  desire  of  laborers  to  maintain  their  standard 
of  living.  Nothing  could  be  more  incorrect  than  tho 
theory  that  rents  paid  to  landowners  are  a  necessary 
cause  of  poverty,  attending  all  social  progress. 

2.  Mr.  George  holds  that  a  single  tax,  equal  to  the 
rental  value  of  all  land,  apart  from  improvements,  would 
yield  more  than  enough  to  support  the  government,  and 
would  make  all  other  taxation  unnecessary.  His  scheme 
would  secure  for  the  uses  of  society  that  part  of  the 
product  of  industry  that  landowners  now  acquire  as  a 
result  of  social  growth  and  development.  He  holds 
that  all  other  taxes  discourage  capital  and  labor,  but 
that  the  single  tax  on  land  would  not  discourage  indus- 
try. It  is  impossible  to  determine  exactly  how  much 
the  single  tax  would  yield  in  the  United  States,  and 
we  cannot  say  certainly  that  it  would  yield  more  or 
less  than  enough  to  cover  the  expenses  of  our  govern- 
ments,  national,  state,  and  local.  But  on  financial 
grounds,  which  cannot  be  enlarged  upon  here,  any 
single  tax  is  highly  objectionable,  and  is  condemned 
by  all  authorities.1 

3.  Mr.  George  urges  very  strongly  that  it  is  unjust 
to  allow  any  persons  to  own  the  land,  which  is  a  free  gift 
of  nature  to  all  men.  All  people  should  have  an  equal 
opportunity  to  use  the  land,  and  landowners  infringe 
upon  this  natural  right.    Since  private  ownership  of  land 

1  SeeBASTABLE."  Public  Finance, "31 2-3 10  ;  Pu.nw"  Public  Finance," 
105-110;  Ely,  "Taxation,"  88,  S9 ;  Ski. I*. man,  "Essays  in  Taxation," 
73-75, 


462  PRINCIPLES   OF  ECONOMICS. 

is  wrong,  it  is  not  necessary  to  compensate  present  own- 
ers,  especially  since  so  many  existing  titles  to  land  were 
based  originally  upon  violence  and  robbery.  Modern 
writers,  however,  have  practically  given  up  the  attempt 
to  define  "  natural  rights."  They  hold  that  all  of  a 
person's  rights  are  based  upon  considerations  of  social 
utility,  and,  therefore,  consider  the  justice  of  landowner- 
ship  to  be  a  question  of  social  utility.  As  a  matter  of 
fact,  most  of  Mr.  George's  arguments  aim  to  show  the 
injurious  effects  of  landownership. 

§  314.    In  studying  Mr.  George's  plans  for  land  na- 
tionalization, the  following  considerations  are  important: 

«™^oi™„  1-   Iii  one  sense  of  the  word,  economic 

special  con-  ' 

siderations      rent  may  be  called  an  unearned  income ;  yet 

concerning 

land  nation-  it  accrues  mainly  to  people  who  incur  the 
risks  of  investing  in  land,  and  cannot  be 
secured  without  the  exercise  of  foresight.  Now,  Mr. 
George  assumes  that  such  investors  never  lose,  but  al- 
ways gain.  This  is  far  from  true,  as  has  been  pointed 
out  (§  276).  At  present,  investors  run  the  risk  of  loss 
when  they  purchase  land  and  improve  it.  This  risk  is 
counterbalanced  by  the  prospect  of  an  increase  in  eco- 
nomic rent.  Mr.  George  would  have  the  State  appro- 
priate all  such  increments  of  economic  rent,  while 
investors  would  bear  all  the  losses  on  improvements 
that  should  become  unprofitable  on  account  of  changes 
in  the  direction  of  the  growth  of  the  community.  The 
late  President  Walker  said,  justly,  "  Heads  I  win,  tails 
you  lose,  is  not  a  game  at  which  the  State  can,  in  fair- 
ness or  decency,  play  a  part."     If  the  State  takes  from 


LAND  NATIONALIZATION  4G3 

an  investor  all  increments  of  rent  due  to  social  causes,  it 
should  guarantee  him  from  losses  on  capital  invested  in 
improvements,  provided  that  those  losses  result  from 
social  "causes  over  which  he  has  no  control. 

2.  As  a  revenue  measure,  the  single  tax  would  often 
prove  a  disappointment.  In  England,  for  instance,  the 
rents  of  practically  all  agricultural  lands  have  steadily- 
fallen  for  more  than  twenty  years.  If  the  English  gov- 
ernment had  bought  out  all  owners  of  agricultural  lands 
at  the  time  when  The  Land  Tenure  Reform  Association 
proposed  such  a  course,  it  would  have  made  a  decidedly 
bad  investment.  In  many  states  of  our  Union  the  same 
thing  is  true  of  agricultural  rents,  while  it  has  occurred 
repeatedly  in  cities. 

3.  We  must  admit  that  a  large  unearned  increment 
of  ground  rents  is  secured  by  the  owners  of  specially 
favored  lots.  No  one  would  question  the  justice  of  im- 
posing a  part  of  the  burden  of  taxation  upon  such  an 
income ; 1  but  we  should  not  forget  that  there  are  other 
unearned  incomes  besides  those  secured  from  some 
pieces  of  land.  When  a  monopoly  of  any  sort  develops 
an  unusually  profitable  field  of  investment,  part  of  the 
monopoly  profits  are  an  unearned  income,  and  should 


1  Most  writers  favor  heavier  taxation  of  economic  rent,  and  lighter 
taxation  of  improvements,  particularly  in  cities  where  the  two  things  can 
be  separately  estimated  with  ease.  The  common  practice  of  taxing  un- 
improved laud  for  only  a  very  small  percentage  of  its  market  value  is 
bad.  It  places  a  premium  upon  withholding  land  from  use,  and  waiting 
for  a  rise  in  its  value.  It  discourages  the  improvement  and  use  of  such 
land,  because  the  assessment  of  the  laud  itself  is  raised  as  soon  aa  im 
pro^emeuts  are  made. 


464  PRINCIPLES  OF  ECONOMICS. 

be  taxed  also.  As  a  simple  matter  of  fact,  all  those 
persons  who  have  the  good  fortune  to  be  favorably 
affected  by  each  actual  turn  of  social  development  are 
likely  to  receive  unearned  incomes.  It  is  just  to  tax 
all  of  these  incomes  whenever  they  can  be  reached  with 
certainty ;  but  to  tax  them  all  away  is  quite  a  different 
matter.  Finally,  in  the  United  States,  there  are  practi- 
cally no  restrictions  upon  the  purchase  or  sale  of  land. 
Any  unearned  increment  is  likely  to  be  distributed  quite 
widely,  because  landownership  is  widely  extended. 

4.  Mr.  George's  plan  of  confiscating  the  value  of  land 
without  compensating  present  owners  does  not  appeal 
to  the  conscience  of  the  average  American  as  just. 
Society  has  allowed  private  landownership  in  this  coun- 
try ever  since  English  settlement.  The  present  owners 
have  invested  in  land  in  good  faith.  If  it  should  be 
decided  inexpedient  to  continue  our  present  system,  the 
burden  of  the  change  should  not  be  thrown  upon  the 
single  class  of  landowners. 

II.    Socialism. 

§  315.    "  Socialism  is  that  contemplated  system  of  in- 
dustrial society  which  proposes  the  abolition  of  private 
property  in  the  great  material  instruments 

Definition  and     l       '  & 

explanation  of   of  production,  and  the  substitution  therefor 
of  collective    property  ;   and  advocates  the 
collective  management  of  production,  together  with  the 
distribution  of  social  income  by  society,  and  private  prop- 
erty in  the  larger  proportion  of  this  social  income." 1 

1  Ely,  Socialism  and  Social  Reform,  p.  19. 


SOCIALISM.  465 

Four  important  features  common  to  nil  socialistic 
schemes  are  contained  in  this  definition  of  Prof.  Ely's.1 

1.  Socialists  desire  common  or  social  own- 

The  four  car- 

ership  of  land   and   productive  capital,  the  dinai  elements 

.       .  •    i     £     l  c  i      i-  of  socialism, 

important    material    factors    ot    production. 

This  would  require  the  abolition  of  private  ownership 

of  these  forms  of  property,  as  allowed  by  our  present 

laws.     Some  socialists  have  favored  the  compensation 

of  present  owners  of  land  and  productive  capital ;  others 

deny  the  justice  or  necessity  of  doing  so. 

2.  Socialism  means,  in  the  second  place,  the  organi- 
zation and  management  of  productive  enterprises  by 
society.  This  means,  of  course,  management  by  gov- 
ernment, either  as  constituted  at  present  or  as  reformed 
under  the  socialistic  rSgime.  Mr.  George,  who  favors 
the  nationalization  of  land,  would  leave  the  management 
of  industrial  enterprises  to  private  individuals.  Social- 
ists hold  that  private  management  of  industry  leads  to 
disastrous  results.  Under  socialism,  persons  engaged 
in  productive  industry  would  become  practically  govern- 
ment employees. 

3.  In  the  third  place,  socialism  means  that  the  social 
income  shall  be  distributed  among  individuals  by  the 
authority  of  the  government,  and  according  to  some 
plan  that  will  secure  a  just  distribution  of  wealth. 

4.  Finally,  socialism  would  allow  private  property  in 
the  incomes  received  by  individuals  from  the  govern- 
ment.    Part  of  the  income  of  society  would  be  reserved 

1  It  must  be  understood  that  this  explanation  aims  at  essential  features 
merely,  and  has  special  reference  to  the  modern  forms  of  socialism. 


466  PRINCIPLES   OF  ECONOMICS. 

by  the  government  for  public  purposes,  as  is  done  at 
present  by  our  systems  of  public  revenues.  In  our  high- 
ways, parks,  libraries,  and  schools,  individuals  receive  at 
the  present  a  considerable  portion  of  their  real  incomes 
out  of  a  common  fund. 

It  is  possible  to  call  any  form  of  governmental  activity 

socialistic.      Our  post-office    is  a  socialistic    institution 

in  this  sense  of  the  term,  and  any  person 

Ambiguous  use 

of  the  term      who  prefers  national  to  private  ownership  of 
soc     sm.     ^e  pogj.  0^ce  jg  a  socialist,  to  that  extent. 

Municipal  ownership  of  water  works  is  socialistic,  and 
hundreds  of  our  towns  and  cities  have  adopted  this  form 
of  socialism.  Those  who  are  properly  called  socialists 
differ  from  the  rest  of  us,  who  oppose  their  projects,  sim- 
ply in  the  extent  to  which  they  favor  social  ownership 
and  management  of  industrial  enterprises.  The  term 
"socialist"  is  ignorantly  or  dishonestly  applied  as  a  term 
of  reproach  to  any  one  who  proposes  that  the  govern- 
ment shall  assume  control  of  any  new  classes  of  enter- 
prises. People  have  ceased  to  be  scared  by  the  mere 
name  of  socialism.  In  the  broad  sense  of  the  term,  we 
are  all  socialists.  Technically,  however,  socialism  should 
mean  the  proposal  to  adopt  social  ownership  and  man- 
agement of  all  important  productive  enterprises,  leaving 
practically  nothing  to  private  initiative.  Few  people  in 
this  country  favor  such  a  policy  at  the  present  time.1 


1  Iii  order  to  avoid  the  reproach  considered  to  accompany  the  word 
"  socialist,"  i  lie  name  of  "  nationalist  "  lias  been  adopted  by  many  persons  in 
this  country  who  i'avor  socialism.  In  Europe  the  word  "  collectivism"  is 
used. 


SOCIALISM.  4G7 

Socialism  must  not  be  confounded  with  anarchism. 
The  anarchist  believes  that  all  control  or  coercion  of 
one  individual  by  another  is  wrong ;  that  Sociausm  a^ 
government  implies  such  control,  and  is  anarchism, 
necessarily  a  bad  thing ;  and  that  the  worst  traits  of 
human  nature  have  been  caused  by  the  repressive  in- 
fluence of  government.  Therefore  anarchists  desire 
to  overthrow  all  governments.  With  these  abolished, 
anarchists  profess  to  believe  that  men  would  voluntarily 
cooperate  in  some  manner  to  effect  such  purposes  as 
could  not  be  secured  by  individual  action.  The  socialist, 
desiring  to  place  the  control  of  all  industry  in  the  hands 
of  the  government,  cannot  well  be  an  anarchist  at  the 
same  time.  As  a  matter  of  fact,  socialists  and  anarch- 
ists have  antagonized  each  other  most  bitterly. 

§  316.  Some  socialists  have  desired  to  secure  their 
ends  by  sudden  revolutionary  measures.  Such  ideas 
have  generally  been  given  up,  and  intelligent 

°  J  fo  '  '  fo  Revolutionary 

socialists  now   look  forward  to  a  more  or  and  evoiution- 

i  j      i  •    t    •  t  ii  e  ary  socialism. 

less  gradual  socializing  ot  the  means  or  pro- 
duction. At  the  present  time  evolutionary  socialism 
takes  one  of  two  forms :  First,  it  is  looked  upon 
merely  as  a  gradual  extension  of  existing  governmental 
institutions.  Governments  already  carry  on  many  more 
branches  of  activity  than  people  usually  realize.  One 
class  of  socialists,1  therefore,  looks  forward  to  the  as- 
sumption by  the  government  of  one  branch  of  industry 
after  another,  as  fast  as  the  public  can  be  convinced  that 

i  This  class  is  represented  by  the  English  socialists  of  the  Fabian 
Society. 


4G8  PRINCIPLES  OF  ECONOMICS. 

such  a  course  is  desirable  and  necessary.  The  second 
group  is  represented  by  the  German  socialists,  the  fol- 
lowers of  Karl  Marx.  They  hold  that  socialism  will  be 
the  inevitable  result  of  known  forces  that  operate  in  the 
economic  world.  These  are  the  forces  of  modern  capi- 
talistic production.  The  growing  importance  of  capital 
in  modern  machine  industry  has  replaced  small-scale  by 
large-scale  production.  At  the  present  moment  trusts 
and  industrial  combinations  are  alleged  to  be  replacing 
individualistic  production  on  a  large  scale.  In  the  future 
all  branches  of  production  will  be  concentrated  in  the 
hands  of  a  few  monopolies  ;  and  then  governments  will 
interfere  to  assume  the  ownership  and  direction  of  all 
industries. 

§  317.    Socialism  is  not  new,  but  is  a  very  old  theory 
that  has  reappeared  constantly  in  one  form  or  another, 

at   least  since  the   time   of   Plato.     It   has 

Socialism  a 

very  old  been  advanced  often  when  a  sharp  separa- 
tion between  the  classes  of  rich  and  poor 
has  brought  the  problem  of  poverty  to  the  front.  Ideals 
of  political  or  social  equality  have  been  another  cause  of 
socialistic  theories.1  Plato's  "  Republic,"  with  its  pro- 
posals for  the  extremest  subordination  of  individual  life 
to  the  direction  of  the  State,  has  for  its  background  a 
sharp  separation  of  classes,  and  a  bitter  conflict  between 
rich  and  poor,  that  occurred  not  only  in  Athens  but  in 
most  of  the  Grecian  cities.  In  the  sixteenth  and  seven- 
teenth centuries,  the  social  distress  caused  by  widespread 

1  See  ROSCHER,  T.  237-239,  for  an  interesting  statement  of  the  condi- 
tions favorable  to  the  growth  of  socialism. 


SOCIALISM.  469 

economic  and  political  changes  led  to  such  works  as  Sir 
Thomas  More's  "Utopia"  and  Campanula's  "City  of 
the  Sun."  Again,  in  the  eighteenth  century,  the  misery 
existing  in  France  before  the  Revolution  furnished  a  fruit- 
ful field  for  socialistic  speculations.  Finally,  since  the 
Industrial  Revolution,  the  increased  importance  of  capi- 
tal has  caused  a  sharper  separation  of  capitalists  and 
laborers,  and  has  furnished  the  ground  for  the  growth 
of  modern  socialism.  This  movement  has  been  strength- 
ened by  the  growth  of  democratic  political  ideals.1 

§  31 8.  Socialists  criticise  severely  our  present  methods 
of  producing  wealth,  and  hold  that  production  could  be 

much  more  efficientlv  managed  under  social- 

.  .  Critical  exam- 

ism.  Ihey  urge  that  competitive  methods  ination  of  sc- 
are "planless."  Producers  now  work  at  SuSitotta 
cross  purposes  ;  mistakes  are  common  ;  and  production 

.      .  ,  .      of  wealth, 

our  industry  is  far  less  productive  than  it 

would  be  if  managed  on  the  largest  possible  scale,  in 
accordance  with  comprehensive  general  plans.  Sec- 
ondly, our  present  competitive  methods  cause  a  great 
deal  of  waste.  Not  only  have  we  much  unnecessary 
reduplication  of  plants,  but  also  needless  expenses  for 

1  The  student  would  find  it  interesting  to  read  Plato's  "  Republic"; 
see  JowettIs  "  Dialogues  of  Plato,"  III.  There  is  hardly  a  better  criti- 
cism of  socialism  than  that  passed  by  Aristotle  upon  Plato's  schemes  ;  see 
Aristotle's  "  Politics."  Rk.  II.,  Chaps.  3  and  5.  Plato's  "  Republic"  has 
been  called  "  the  fruitful  parent  of  modern  Utopias  ;  "  and,  after  studying 
it,  the  student  might  read  the  socialistic  romances  contained  in  Morley's 
"  Ideal  Commonwealths."  especially  Moke's  "Utopia"  and  Camf.vnella'? 
"City  of  the  Sun."  Then  Mr.  Bellamy's  "  Looking  Rackward,"  the  best 
known  of  the  romances  representing  modern  socialism,  might  be  read  in 
connection  with  these  earlier  writers. 


470  PRINCIPLES   OF  ECONOMICS. 

advertising,  traveling  salesmen,  and  similar  purposes. 
Thirdly,  producers  have  a  strong  inducement  at  present 
to  increase  the  value  of  their  commodities  by  restricting 
the  output,  as  is  done  by  the  anthracite  coal  monopoly. 
Society  is  poorer  on  account  of  the  artificial  scarcity 
created  in  this  way.  Again,  socialists  show  that  there 
is  great  waste  in  our  methods  of  exchanging  products. 
Many  more  people  are  engaged  in  wholesale  and  retail 
trade,  especially  in  the  latter,  than  are  really  needed. 

We  must  admit  that  there  is  a  great  deal  of  truth  in 

all  of  these  criticisms.     But  such  an  admission  does  not 

objections  to     necessarily  lead  to  the  acceptance  of  social- 

sociaiism  as  a  -sm>     For  t^e  weakness  0f  socialism  is  even 

scheme  for 

production,  greater  than  that  of  the  present  system. 
1.  First  of  all,  will  socialism  lead  men  to  exert  them- 
selves as  actively  as  they  do  at  present  under  the  desire 
for  pecuniary  gain  ?  Socialists  urge  that  the  desire  for 
social  esteem  is  a  powerful  motive  at  present,  and  would 
prove  still  more  so  under  their  system.  But  while  many 
people  are  influenced  by  the  desire  for  social  esteem, 
others,  apparently,  are  not  deeply  affected  by  this 
motive.  Moreover,  social  esteem  of  one  kind  or  another 
can  be  gained  at  present  by  many  actions  that  do  not 
conduce  to  the  real  welfare  of  society;  and  it  is  not  clear 
that,  under  socialism,  public  opinion  would  so  change 
that  men  could  not  gain  notoriety  in  ways  that  would 
be  thoroughly  harmful.  Also  socialists  claim  that 
altruistic  motives  may  be  expected  to  have  greater 
force  under  a  socialistic  rigime.  But  we  have  no  expe- 
rience that  justifies  us  in  assuming  that  the  majority  of 


SOCIALISM.  471 

men  will,  in  any  immediate  future,  exert  themselves  as 
actively  under  the  influence  of  such  motives  as  they 
do  at  present  under  the  stimulus  of  self-interest.  Of 
course,  the  socialistic  State  might  compel  men  to  work. 
But  would  such  labor  be  more  effective  than  that  of 
slaves  or  convicts  ? 

2.  The  difficulties  of  organizing  and  managing  all 
industries  on  a  national  scale  arc  enormous.  These 
difficulties  would  be  especially  great  in  industries  like 
agriculture  that  do  not  lend  themselves  readily  to  large- 
scale  production.  Moreover,  governmental  management 
presents  serious  problems,  chiefly  the  difficulty  of  secur- 
ing as  honest  and  efficient  administration  as  can  be 
secured  by  private  enterprise,  at  its  best.  Doubtless  our 
methods  of  public  administration  can  be  improved,  and 
would  be  further  improved  before  the  government 
should  assume  the  control  of  industry.  But  we  have 
no  reason  to  believe  that  the  government  could  avoid 
errors,  or  that,  on  the  whole,  it  could  carry  on  manu- 
factures and  agriculture  more  successfully  than  they  are 
conducted  at  present. 

3.  Another  difficulty  that  socialism  would  encounter 
would  be  the  determination  of  methods  for  distributing 
the  labor  force  among  the  various  employments.  Some 
are  much  more  pleasant  or  are  esteemed  more  highly 
than  others.  Will  it  be  possible  for  the  government 
to  apportion  the  more  important  or  more  desirable 
positions  in  such  a  way  as  to  cause  less  dissatisfaction 
than  at  present?  A  very  important  question  arises 
here.     By    eliminating   incompetent   persons   from    the 


472  PRINCIPLES   OF  ECONOMICS. 

field  of  competition  we  manage  fairly  well  at  present  to 
secure  able  management  of  industries ;  and  we  offer  the 
prospect  of  exceptional  profits  as  a  Be  ward  for  special 
efficiency.  Will  the  mass  of  people  living  under  a 
socialistic  government  consent,  by  their  votes  or  other- 
wise, to  adequate  methods  of  securing  able  business 
management  ?  Taking  men  as  we  find  them  at  present, 
this  may  well  be  doubted. 

§  319.  The  main  argument  in  favor  of  socialism  has 
always  been  that  it  would  secure  a  more  just  distribution 

,   .  of  wealth  than  can  possibly  be  brought  about 

Socialism  con-  L  J  ° 

sideredasa  by  competition.  Socialists  have  no  difficulty 
distribution  in  showing  that  present  methods  fall  far 
of  wealth.  sn0rt  of  securing  satisfactory  results  in 
many  cases.  But  they  have  not  always  agreed  as  to 
what  constitutes  justice  in  distribution.  At  present, 
however,  socialists  are  inclined  to  hold  that  equality  of 
income  would  secure  at  least  approximate  justice. 
Without  discussing  the  principles  of  distribution  accord- 
ing to  merit,  which  were  advanced  by  earlier  socialists, 
it  is  sufficient  to  say  that  equality  of  income  would  be 
the  only  practicable  plan  in  a  socialistic  regime.  The 
difficulties  of  having  public  authorities  decide  whose 
merit  or  whose  need  is  greatest,  to  say  nothing  of  the 
difficulty  of  inducing  the  majority  of  the  people  to 
assent  to  such  decisions,  is  a  fatal  weakness  in  any  plan 
except  that  of  equality  in  distribution. 

Now,  from  a  social  point  of  view,  equality  in  distri- 
bution is  not  desirable.  Some  men  have  far  greater 
natural  abilities  than    others.      Society   suffers   a   sei-i- 


socialism.  473 

mis  loss  when  a  gifted  person  fails  to  secure  the  menus 
of  developing-  his  special  talents.  For  this  reason  it  is 
socially    desirable    that    people    possessing 

/  i       i  r  ©    Equality  in 

superior  faculties  should  have  the  means  of  distribution  is 
gratifying  them;  and  this  implies  that  they  ^  esira  e* 
must  receive  more  than  less  talented  persons  secure. 
Our  present  distribution  of  wealth  may  be  fairly  criti- 
cised because  it  fails  to  secure  to  many  talented  persons 
the  means  of  developing  their  faculties,  so  that  they 
may  render  the  highest  service  to  society.  But  socialism, 
with  its  plan  for  equality  of  income,  would  be  still  more 
objectionable.1  Finally,  equality  of  income  would  be 
likely  to  remove  that  stimulus  to  invention  and  enter- 
prise to  which  we  owe  so  much  of  our  present  economic 
progress. 

Socialists  might  conceivably  secure  an  equal  distribu- 
tion of  social  income  by  allotting  to  all  individuals  pre- 
cisely the   same  amounts    of   all   kinds   of  _.„   _,_    . 

J  Difficulty  of 

commodities.     But  this  would  be  an  imprac-  finding  a  value 
, .      ,  ,  -li  11    denominator 

ticable  arrangement,  since  all  persons  would  under 

not  want  to  secure  exactly  the  same  things.  S0CiaUsm- 

Accordingly  socialists  declare  that  equality  of  incomes 

should  mean  equality  of  values.    Then  arises  the  question, 

How  shall  these  values  be  determined  and  expressed  ? 

1  Some  socialists  urge  that,  under  socialism,  production  would  be  so 
large  that  all  men  would  be  able  to  gratify  every  rational  desire.  But 
nothing  could  be  further  from  the  truth.  Our  present  production,  if 
evenly  distributed,  could  not  do  more  than  secure  a  comfortable,  but 
frugal,  living  to  all.  Under  socialism  there  is  abundant  reason  to  question 
whether  production  would  be  even  as  large  as  it  is  under  our  present 
system. 


47-4  PRINCIPLES  OF  ECONOMICS. 

Socialists  say  that  value  should  depend  upon  the  "  aver* 
age  labor  time "  required  to  produce  a  commodity. 
Each  person  should  receive  his  income  perhaps  in  the 
form  of  "  labor  checks  "  that  should  entitle  him  to  goods 
representing  so  much  labor  time.  We  will  grant  that 
such  a  computation  of  the  value  of  all  commodities  in 
terms  of  units  of  labor  time  has  been  made,  although  it 
would  be  possible  to  show  that  the  differences  between 
different  grades  of  labor  make  it  impossible  to  reduce 
all  grades  to  terms  of  common  unskilled  labor.  But, 
assuming  that  the  labor  unit  is  atta^nja&le,  it  could  not 
work  as  a  means  of  distributing  incomes.  For  two 
goods  may  represent  exactly  the  same  amounts  of  labor, 
and  yet  one  of  them  may  be  in  much  greater  demand 
among  consumers.  If  both  are  procurable  at  the  same 
price  expressed  in  terms  of  labor  time,  then  the  supply 
of  the  most  desirable  one  will  be  exhausted  immediately. 
Supply  and  demand  cannot  be  equalized  by  fixing 
prices  on  the  basis  of  labor  time.  Market  prices  must 
depend  upon  the  marginal  utility  of  the  products  to  con- 
sumers. It  is  impossible  to  see  how  supply  and  demand 
can  be  equalized  except  by  changing  prices.  Labor  time 
is  an  impossible  unit  in  which  to  express  values.1 

§  320.    Socialism,    therefore,   has    fatal    weaknesses, 
concluding      whether  considered  as  a  scheme  for  the  pro- 
considerations,  duction  or   for  the  distribution  of  wealth. 
Those  who  favor   it   are   often  persons  of  the  highest 

1  This  subject  cannot  he  elaborated  hero.  See  Ely,  Socialism  and  Social 
Reform,  244-247;  Hadlby,  Economics,  93-90 ;  Schafflb,  Quintessence 
of  Socialism,  77-89. 


SOCIALISM.  475 

character,  who  are  influenced  by  the  desire  to  remedy 
the  admitted  evils  of  our  present  system.  They  believe 
that  socialism  would  have  beneficial  moral  effects,  and 
that  it  would  favor  the  growth  of  many  of  the  best  and 
highest  elements  of  our  civilization.  But,  if  socialism 
is  an  impossible  plan  for  the  production  and  distribution 
of  wealth,  we  shall  have  to  reject  it,  although  in  many 
other  respects  it  might  offer  an  attractive  programme.  It 
may  be  well,  furthermore,  to  suggest  that  socialism 
would  probably  endanger  liberty  of  thought  and  action 
in  important  respects.  With  all  branches  of  production 
ill  the  hands  of  the  government,  it  would  be  difficult  for 
any  one  to  criticise  the  policy  of  the  public  authorities. 
Government  officials  would  have  extreme  powers  of 
annoying  those  who  criticised  their  measures.  It  is 
doubtful  whether  a  socialistic  State  would  permit  an 
agitation  to  be  carried  on  against  socialism,  for  instance. 
At  present,  people  can  find  in  private  business  a  vantage 
ground  from  which  they  may  freely  criticise  men  and 
measures.  Would  a  socialistic  government  furnish  the 
paper,  printing  presses,  postal  facilities,  and  public  halls 
necessary  for  free  speech  and  public  discussion  hostile 
to  itself?  In  conclusion,  it  may  be  said  that  socialists 
have  often  shown  themselves  to  be  useful  critics  of  the 
existing  economic  order.  The  student  should  weigh 
carefully  the  criticisms  advanced  by  such  writers.  While 
he  may  have  to  reject  their  principal  proposals,  he  should 
not  overlook  the  useful  portions  of  their  writings. 

Few  people,  it'  any,  would  care  to  assert  that  existing 
methods  of  production  arc  above  criticism,  or  that  our 


47G  PRINCIPLES  OF  ECONOMICS. 

present   methods  of   distribution   secure    exact   justice. 

But  this  much  can  be  affirmed  :  private  enterprise  has 

„    .   „„         been  able  to  increase  in   a   marked    man- 

The  justifica- 
tion of  private   ner  the  production  of  wealth,  and  holds  out 

individual  a  prospect  of  continued  improvement ;  the 
enterprise.  present  distribution  of  wealth  has  subserved 
fairly  well  the  highest  interests  of  our  civilization,  while 
the  laborers,  who  make  up  the  most  numerous  social 
class,  have  been  able  to  improve  constantly  their  posi- 
tion. Moreover,  our  present  system  secures  reasonable 
opportunity  for  criticism  and  freedom  for  experimenta- 
tion ;  so  that  it  is  possible  to  try  to  improve  any  features 
that  are  shown  to  be  unsatisfactory.  Rational  criticism, 
enlightened  public  opinion,  and  resolute  self-reliance  in 
overcoming  economic  difficulties  seem  to  offer  the  most 
practicable  method  of  reforming  and  reshaping  existing 
institutions.  In  some  directions  reform  may  best  be 
secured  by  extending  the  activity  of  government.  Such 
cases  can  be  dealt  with  as  they  arise.  We  should  feel 
glad  to  have  socialists,  or  any  other  persons,  point  out 
the  weak  places  of  the  existing  economic  order,  or  offer 
methods  by  which  improvements  can  be  effected. 


LITERATURE.  477 


LITERATURE  ON  CHAPTER  XV. 

On  Land  Nationalization :  Ely,  Economics,  365,  3GG ;  George, 
Progress  and  Poverty;  Hadley,  Economics,  469-474;  Pleiin, 
Public  Finance,  106-109;  Seligman,  Essays  in  Taxation,  64-91-. 
Single  Tax  Debate,  Journal  of  Social  Science,  XXVII. ;  Walk  eh, 
Political  Economy,  407-433,  Land  and  its  Rent. 

On  Socialism  :  Andrews.  Institutes  of  Economics,  20-24 ; 
Bellamy,  Looking  Backward;  Bohm-Bawerk,  Capital  and  In- 
terest, 315-392  ;  Dawson,  German  Socialism  and  Ferdinand  Las- 
salle;  Ely,  Outlines  of  Economics,  308-315,  French  and  German 
Socialism,  Socialism  and  Social  Reform  ;  Gide,  Political  Economy, 
398-169 ;  Graham,  Socialism,  New  and  Old ;  Gronlund,  The 
Cooperative  Commonwealth ;  Kirkup,  Inquiry  into  Socialism, 
History  of  Socialism  ;  Laveleye,  Socialism  of  To-day ;  Marx, 
Capital ;  Mill,  Principles  of  Political  Economy,  Book  II.  Chaps.  1, 
2,  and  3;  Morley,  Ideal  Commonwealths;  Rae,  Contemporary 
Socialism  ;  Roscher,  Political  Economy,  I.  235-267  ;  Schaffle, 
The  Quintessence  of  Socialism  ;  Walker,  Political  Economy,  517- 
524  ;  Wools ey,  Communism  and  Socialism. 


478  PRINCIPLES   OF  ECONOMICS. 


CHAPTER   XVI. 

THE   ECONOMIC    FUNCTIONS   OF   GOVERNMENT. 

I.   Economic  Functions  Performed  by  Governments. 

§  321.    Many  times  in  the  preceding  chapters  it  haa 

been  necessary  to  explain  that  the  government  plays  an 

importance      important  part  in    our  economic  life,  or  to 

oi}^e   .         discuss  the  advisability  of  having  the  gov- 

action  of  J  °  ° 

governments,  ernment  perform  some  economic  function 
rather  than  leave  it  to  private  enterprise.  Most  prac- 
tical economic  questions  involve  directly  or  indirectly  the 
question  of  governmental  activity  in  economic  affairs. 
This  subject  cannot  be  avoided  by  the  economist,  even 
if  he  desires  to  do  so,  and  it  will  be  desirable  to  con- 
sider this  topic  at  this  point  before  commencing  the 
study  of  public  expenditures  and  revenues. 
The  economic  §  322.    It  will  be  well  to  summarize  the 

functions actu-    Yarjous  economic  functions  which  we  have 

ally  performed 

by  government,  found  to  be  exercised  by  governments   at 

the  present  time. 

First,  governments   aim   to   protect   persons   and  to 

maintain  older.  Then  they  define  and  protect  the 
Fundamental  rights  of  property  and  contract.  Personal 
rights.  freedom,  private  property,  and  the  right  of 

contract  are  fundamental  elements  in  our  economic  life. 


ECONOMIC  FUNCTIONS  OF   GOVERNMENTS.       4  7'.) 

In  order  to  secure  the  best  results  in  industrial  life, 
modern  governments  guarantee  individuals  the  enjoy- 
ment of  certain  privileges.  Patent  rights,  Guaranteed 
trade-marks,  and  copyrights  are  privileges  Privileees- 
granted  in  order  to  stimulate  the  general  activity  of  the 
people.  Moreover,  governments  allow  individuals  to 
enjoy  much  freedom  in  the  establishment  of  industries. 
This  privilege  is  restricted  when  the  government  as- 
sumes the  management  of  any  enterprise,  or  regulates 
the  conditions  upon  which  individuals  may  carry  on 
any  business. 

In  the  third  place,  the  government  regulates  the  terms 
of  competition  in  some  cases  where  evil  results  would  be 
produced  on  account  of  the  unequal  strength  Regulation  or 
of  different  individuals.      Laws    regulating  equalization  of 

°  D    tie  terms  of 

the  labor  contract,  regulating  rates  of  inter-  competition, 
est,  regulating  freight  rates,  or  providing  for  the  inspec- 
tion of  food  products,  are  examples.     These  laws  limit 
nominal  freedom,  but  may  increase  the  real  freedom  of 
individuals  in  many  cases. 

Oftentimes  governments  participate  in  private  enter- 
prises.     Such   participation    occurs   when   subsidies  or 
bounties  are  bestowed  by  the  government  on  participation 
private  enterprises.      These  have  taken  the  of  government 

11  in  private 

form  of  gifts  of  land  and  money,  as  in  the  enterprises. 
United  States,  where  millions  of  acres  of  land  and  mil- 
lions of  dollars  of  money  have  been  given  to  aid  railroads. 
Sometimes  the  subsidy  may  take  the  form  of  a  loan.  Pro- 
tective duties  are  another  case  where  the  government 
gives  aid  to  private  enterprises.     Again,  for  works  of  a 


480  PRINCIPLES   OF  ECONOMICS. 

semi-public  character,  in  which  private  enterprises  must 

use  public  streets,  or  must  secure  a  right  of  way  through 

private  property,  the   government  grants  franchises  to 

individuals,  i  V 

Finally,   governments    carry   on    many   useful    public 

works,  designed  wholly  or  in  part  to  promote   industry. 

Roads,  sewers,  parks,  harbor  improvements, 
Administra-  .  . 

tion  of  useful    consular    services,   collections    of   statistics, 

pu  cwor  .  jjo-litliouses,  dikes,  coinage  of  money,  sanitary 
provisions,  educational  facilities,  postal  facilities,  water 
works,  gas  and  electric  lighting  works,  street  and  steam 
railways,  and  telegraph  and  express  facilities  are  impor- 
tant examples.  Some  of  these  enterprises  could  not  or 
would  not  be  carried  on  by  private  individuals,  because 
the  benefit  to  the  public  is  intangible  or  indefinite,  and 
no  sufficient  return  could  be  secured.  Others  might  be 
left  to  private  enterprise,  and  actually  are  conducted  by 
private  individuals  in  many  cases. 

§  323.    Prior  to  the  present  century,  the  governments 

of   Europe  had   long  endeavored    to  control  nearly  all 

ow  and  mod-    branches  °f  economic  activity  in  an  extreme 

ern  views  of    degree.1     This  was   done   from   the   theory 

the  economic  .  . 

functions  of     that  private  enterprise  is  unable  to  accom- 

government.    ^[[^  many  things  that  society  needs  to  have 

done,   or   from   the   theory   that   there   is   a  necessary 

antagonism  between  private  and  public  interests.     Thus 

it  was  thought,  in  the  first   case,  that  a  nation    could 

1  Nearly  the  same  thing  was  true  in  most  of  the  American  colonies. 
The  economic  life  of  the  people,  as  well  as  their  social  and  moral,  was 
thought  to  need  continual  regulation. 


ECONOMIC  FUNCTIONS  OF   GOVERNMENTS.       481 

secure  a  sufficient  stock  of  money  only  by  regulating 
foreign  commerce  so  as  to  make  exports  exceed  imports 
continually.  In  the  second  case,  it  was  believed  that 
business  men  arc  likely  to  make  their  profits  at  the 
expense  of  the  community,  and  that  restrictive  laws  are 
necessary  to  prevent  this.1 

In  the  year  1776  Adam  Smith  published  his  "  Wealth 
of  Nations,"  combating  vigorously  the  restrictive  policy 
of  European  governments.  He  showed  that  Adam  smith's 
private  individuals  could  acquire  large  profits  views- 
by  supplying  some  real  social  need ;  and  that  men,  in 
pursuing  their  own  personal  interests,  were  commonly 
increasing  the  wealth  of  the  society.  Moreover,  he 
proved  that  many  of  the  restrictions  placed  upon  private 
enterprise  resulted,  not  in  furthering  social  interests,  but 
in  preventing  men  from  serving  each  other.  He  argued 
most  ably  that  the  desire  of  men  to  promote  their  indi- 
vidual interests,  by  establishing  business  enterprises  and 
trading  with  their  fellows,  would  usually  produce  results 
beneficial  to  society.  He  urged  that  the  true  way  for  a 
nation  to  become  rich  is  to  leave  its  citizens  free  to  con- 
duct business  as  they  desire. 

Partly  through  the  influence  of  Adam  Smith,  partly 
through  other  causes,  modern  thought  has  favored  the 
view  that  individuals,  in  seeking  their  own  economic 
interests,  are  regularly  promoting  the  welfare  of  society. 

1  These  theories  form  a  body  of  economic  doctrines  known  as  mercan- 
tilism. They  have  sometimes  been  condemned  too  absolutely  by  modern 
economists.  See  Schmoller,  The  Mercantile  System  (edited  by  Ashley), 
for  a  more  favorable  view  of  mercantilism. 


482  PRINCIPLES   OF  ECONOMICS. 

For  this  reason  many  of  the  old  restrictions  upon  the 

establishment   of   industries,    upon    foreign   commerce, 

upon  the  movements  of  money,  upon  the  rela- 
Modern  . 

views  of         tions  oi  laborers  and  employers,  •were  abol- 

f^c™ntal  ished  dm'ing  the  first   half   of   the   present 
"Laissez        century.     Many  people  were  led  to  the  belief 

f  aire. " 

that  government  should  have  as  little  to 
do  with  economic  matters  as  possible  ;  and  held  that 
"  Laissez  /aire,  laissez  passer"  or  "  leave  things  free  to 
take  their  own  course,"  expresses  the  policy  that  should 
be  followed. 

But  the  old  restrictions  upon  industry  were  no  sooner 
removed  than  people  felt  obliged  to  resort  once  more  to 

governmental   action    to   remedy    disorders 

Reaction  from 

the  "Laissez  which  were  found  to  exist  in  modern  eco- 
po  cy.  nom|c  j-£e_  Factory  acts  and  laws  regulating 
corporations  are  instances  of  such  action.  More  recently 
governments  have  begun  to  assume  the  management 
of  enterprises  that  are  natural  monopolies,  while  the 
demand  is  made  that  more  industries  shall  be  brought 
under  governmental  control  or  ownership.  This  raises 
one  of  the  most  pressing  economic  problems. 

II.    Examination  of  Modern  Theories  of  Governmental 
Functions. 

§  324.  To  the  question  of  the  proper  policy  for 
Difference  government  to  follow  in  respect  to  industry, 
of  views        many  different  answers    arc   given.     It  will 

on  this  ques-  J  ° 

tion.  be   helpful    to    classify    the    various    views 

advanced. 


THEORIES  OE  GOVERNMENTAL   FUNCTIONS.      483 

§  325.    Here,  as  elsewhere,  the  anarchists  answer  that 
government  means  control,  and  control  is  evil,  in  and  of 

itself;  so  that  the  onlv  proper  policy  is  to 

Anarchism, 
abolish  all  government,  and  to  leave  indus- 
try to  the  voluntary  actions  of  individuals.  But  no 
anarchist  has  ever  been  able  to  picture  a  society  organ- 
ized without  any  control  of  one  person  by  others.  For 
all  anarchists  admit  the  necessity  of  securing  common 
action  by  groups,  or  voluntary  associations ;  and  when- 
ever conflicts  of  interest  should  arise  between  groups, 
the  stronger  must  control  the  weaker.  Therefore 
anarchism  is  as  illogical  as  it  is  impossible. 

§  326.    Extreme  individualists  resemble  the  anarchists 
in  considering  government  an  evil.     But  they  regard  it 
as  a  necessary  evil ;  necessary  because  of  the    Extreme  ^ 
imperfections  in  man's  moral  nature.     Men    dividuaiism 

based  upon 

should  be  left  free  to  do  as  they  please,  so    "natural 
long  as  they  do  not  interfere  with  the  equal     ng 
rights  of  others.     Government  should  do  nothing   ex- 
cept prevent  such  interference  by  one  person  with  the 
equal    rights    of   others.      If   men   ever    become    moral 
enough  to  refrain  from  molesting  each  other,  government 
will  no  longer  be  necessary.     For  the  present,  govern- 
ment should  protect  persons  and  property,  and  enforce 
contracts    voluntarily    made    by    sane    adults.      Beyond 
these  "police  powers"  no  wise  government  should  go. 
Extreme"  individualism  is  said  to  be  based  Criticismof 

upon  the  "natural     rights"   of  man.      The   extreme  indi- 
vidualism, 
principle    that    "  every   man    is    free    to    do 

that  which  he  wills,  provided  he  infringes  not  the  equal 


484  PRINCIPLES   OF  ECONOMICS. 

freedom  of  any  other  man  "  is  said  to  be  a  revelation  of 
what  is  naturally  right.  But  men's  ideas  of  what  is  nat- 
urally right  differ  so  widely  that  most  people  have  come 
to  distrust  the  reliability  of  such  revelations.  Nearly  all 
competent  writers  agree  that  our  notions  of  rights  are 
based  upon  considerations  of  the  good  or  evil  effects  of 
our  actions  on  society,  that  is,  upon  social  utility.  As- 
serting that  a  thing  is  a  natural  right  is  merely  one 
way  of  advancing  a  personal  opinion  of  what  is  socially 
desirable,  without  supporting  the  claim  by  arguments, 
Therefore  we  conclude  that  extreme  individualism  can 
be  defended  solely  by  showing  that  it  leads  to  the  best 
results  when  put  into  practice.  Now,  as  a  matter  of 
fact,  nobody  has  ever  been  able  to  put  it  into  actual 
practice  ;  and  we  are  justified  in  claiming  that  it  is  an 
impossible  theory  of  governmental  action. 

§  327.  Most  individualists   have  recognized  that  the 

rights  of  individuals   and  the  functions  of  government 

individualism   can    be  determined    solely  by   considering 

general  wei-     what  is  most  usef  ul  to  society.     Most  econo- 

fare  of  society.  mjs|-s  a^  t]ie  present  day  hold  such  a  view. 

They  believe  that  the  general  good  of  society  is  the 
end  of  all  economic  organization,  and  that  government 
should  extend  its  functions  into  any  field  of  economic 
activity  where  the  best  results  can  be  secured  from  such 
a  policy.  But  they  believe  that  in  most  cases  the  gen- 
eral welfare  is  best  promoted  by  leaving  to  the  individ- 
ual a  large  measure  of  freedom.  They  believe  in  indi- 
vidual enterprise  as  the  rule  for  economic  activity,  but 
favor  governmental  action   whenever  it  can  secure  bet- 


THEORIES  OF  GOVERNMENTAL   FUNCTIONS.     485 

ter  results  in  the  long  run.  Views  of  this  sort  can  be 
characterized  as  moderate  individualism.  They  are  well 
stated  by  Mr.  Mill  in  the  following  words  :  — 

"  But  enough  has  been  said  to  show  that  the  admitted 
functions  of  government  embrace  a  much  wider  field 
than  can  easily  be  included  within  the  ring-fence  of 
any  restrictive  definition,  and  that  it  is  hardly  possible 
to  find  any  ground  of  justification  common  to  them  all, 
except  the  comprehensive  one  of  general  expediency  ; 
nor  to  limit  the  interference  of  government  by  any  uni- 
versal rule,  save  the  simple  and  vague  one,  that  it 
should  never  be  admitted  but  when  the  case  of  expe- 
diency is  strong." 

Individualists  of  this  class  support  their  claim  that 
individual  freedom  leads  to  the  best  results  in  most 
cases  by  the  following  arguments  :  —  tw„-,^ 

J  D        °  Detailed  con- 

1.  They  urge  that  private  individuals  are  siderations of 

the  arguments 
likely  to  know    their  best  interests    better  0f individuai- 

than  the  government  can  know  them,  and  lsts' 

that  there  is  usually  no  antagonism  between  private  and 

social  interests.     Whenever  this  is  found  not  to  hold 

true,  governmental  action  is  proper.     Many  cases  can 

be  enumerated  in  which  individuals  do  not  know  their 

true  interests,  while  in  many  instances  there  may  be  a 

direct  opposition    between    private   interest  and    public 

welfare.     But  individualists  hold  rightly  that  the  rule 

is  the  other  way. 

2.  Individualists  argue  that  a  private  entrepreneur 
has  a  greater  personal  interest  in  the  success  of  his 
undertaking  than  government  officials  often  feel  in  pub- 


486  PMNCIPLES   OF  ECONOMICS. 

lie  enterprises.  Furthermore,  corrupt  administration  is 
liable  to  creep  into  public  affairs.  This  argument  is 
easily  exaggerated,  and  it  is  to  be  expected  that  im- 
proved political  methods  may  continually  decrease  the 
abuses  of  public  administration.  Yet  something  must 
be  conceded  to  the  stronger  interest  and  greater  in- 
ducements to  efficiency  experienced  in  much  private 
industry. 

3.  Individualists  notice  that  when  governments  carry 
on  business  undertakings,  they  may  fall  back  upon  taxa- 
tion as  a  means  of  making  up  possible  deficits.  If  a 
private  enterprise  is  poorly  managed,  the  undertaker 
will  incur  constant  loss,  and  will  be  driven  out  of  busi- 
ness finally.  But  government  enterprises,  if  badly  ad- 
ministered, may  fall  back  upon  taxation,  in  some  form 
or  other,  to  make  up  the  deficits.  Hence  an  inefficient 
public  undertaking  which  incurs  constant  loss  may  not 
be  eliminated  from  the  field  of  industry,  as  is  the  case 
with  private  enterprises. 

4.  Finally,  individualists  believe  that  freedom  in  eco- 
nomic affairs  lias  a  great  educational  influence  upon  the 
people  of  a  country.  The  experience  of  private  busi- 
ness management  often  furnishes  a  valuable  training  in 
many  important  directions.  Moreover,  it  is  highly  de- 
sirable that  a  people  should  be  vigorously  self-reliant, 
and  should  not  be  habitually  dependent  upon  govern- 
mental action  in  too  many  things.  Two  quotations 
from  Mr.  Mill  will  serve  to  emphasize  these  points: 
"A  people  among  whom  there  is  no  habit  of  sponta- 
neous action  for  a  collective  interest,  who  look  habit- 


THEORIES   OF   GOVERNMENTAL   FUNCTIONS.      487 

aally  to  their  government  to  command  or  prompt  them 
in  all  matters  of  joint  concern  —  who  expect  to  have 
everything  done  for  them,  except  what  can  be  made  an 
affair  of  mere  habit  and  routine  —  have  their  faculties 
only  half  developed  ;  their  education  is  defective  in  one 
of  its  most  important  branches."  "  It  is  therefore  of 
supreme  importance  that  all  classes  of  the  community, 
down  to  the  lowest,  should  have  much  to  do  for  them- 
selves ;  that  as  great  a  demand  should  be  made  upon 
their  intelligence  and  virtue  as  it  is  in  any  respect  equal 
to ;  that  the  government  should  not  only  leave  as  far  as 
possible  to  their  own  faculties  the  conduct  of  whatever 
concerns  themselves  alone,  but  should  suffer  them,  or 
rather  encourage  them,  to  manage  as  many  as  possible 
of  their  joint  concerns  by  voluntary  cooperation  ;  since 
this  discussion  and  management  of  collective  interests 
is  the  great  school  of  that  public  spirit,  and  the  great 
source  of  that  intelligence  of  public  affairs,  which  are 
always  regarded  as  the  distinctive  character  of  the 
public  of  free  countries." 

Among  the  economists  who  might  be  called  individ- 
ualists of  this  class  there  are  considerable  differences 
concerning  the  exact  extent  of  the  functions  Differences 
that  they  desire  to  see  exercised  by  govern-  amon? 
ment.      Some   of  them  approve    of   govern-  individualists, 
mental    action   in   many   more    cases   than  others.      A 
second  point  of  difference  is  found  in  the  terms  used  to 
describe  governmental  action.     Those  who  are  inclined 
60  restrict  it  often  refer  to  "governmental  interference 
in  industry,"  and  speak  of  it  as  a  necessary  evil  rather 


488  PRINCIPLES   OF  ECONOMICS. 

than  a  positive  good.  On  the  other  hand,  those  econ- 
omists who  favor  a  certain  extension  of  State  activity, 
do  not  hesitate  to  affirm  that  government  is  a  necessary 
and  beneficent  factor  in  economic  as  in  other  depart- 
ments of  social  life. 

§  328.  The  views  held  by  socialists  concerning  the 
functions  of  government  do  not  need  detailed  discussion 
The  views  of  m  *n^s  chapter.  In  general,  socialists  hold 
the  socialists,  that  individual  freedom  and  enterprise  in 
economic  affairs  usually  lead  to  harmful  results,  so 
that  the  socializing  of  all  branches  of  industry  is  the  true 
policy  for  the  government  to  pursue.  Socialists  aim  at 
the  same  end  that  the  second  class  of  individualists 
have  in  view,  the  general  good  of  society.  They  differ 
from  the  individualists  in  the  methods  of  securing  their 
desired  end. 

III.  The  Several  Functions   of  Government  Considered   from 
the  Point  of  View  of  Individualism. 

§  329.  The  author's  belief  has  been  that  individualists 
are  right  in  affirming  that,  in  most  economic  affairs, 
Point  of  view  individual  enterprise  and  freedom  secure 
of  this  work.  resuits  tliat  are  most  beneficial  to  society. 
But,  in  those  cases  where  individual  enterprise  is  impos- 
sible, or  where  freedom  produces  evil  results  that  can 
be  obviated  by  social  action,  there  is  a  large  and 
Important  field  where  governmental  activity  is  bene 
ficent.  Governments  should  be  viewed,  therefore,  as  a 
useful  and  necessary  agency  for  accomplishing  purposes 
for    which    individual    freedom    or   initiative    is    inade- 


THEORIES   OF  GOVERNMENTAL  FUNCTIONS.      489 

quate.  From  this  point  of  view  it  is  proposed  to 
examine  briefly  the  differences  of  opinion  existing 
among  individualists  concerning  eacli  class  of  functions 
exercised  by  governments. 

§  330.  In  our  classification  of  the  economic  functions 
of  government,  the  definition  and  enforcement  of  the 
rights    of    persons,    property,  and   contract 

I  tic  III  ST  CI3SS 

were  placed  first.      Economists    agree    con-  ofgovemmen- 

j.i  j.«i»i         cji  e        i-  r    tal  functions, 

cerning   the   utility   or     these    functions    of 

government.  It  will  appear,  however,  in  the  following 
paragraphs  that  there  are  differences  of  opinion  in 
regard  to  the  extent  to  which  property  and  contract 
rights  should  be  recognized. 

§  331.    Concerning  the  general  expediency  of  govern- 
mental grants  of  such  privileges  as  patents,  trade-marks, 
and    copyrights,    economists    are    substan-     Thesecond 
tially  agreed.     Yet  a  very  large  number  of     class  of 

functions. 

writers  have  called  attention  to  abuses  con- 
nected with  these  rights,  and  have  desired  a  more  careful 
definition  or  restriction  of  such  privileges.  General 
freedom  in  the  establishment  of  industries  is  not  called 
in  question  except  in  special  cases.  These  exceptions 
are,  first,  industries  where  it  is  important  that  persons 
entering  them  should  have  an  adequate  preparation, 
such  as  professions  and  skilled  trades ;  and  second, 
natural  monopolies  where  attempted  competition  results 
in  needless  duplication  of  plants. 

§  332.  Few  will  deny  that  government  should  equal- 
ize the  terms  of  competition,  when  there  is  very  serious 
inequality  between  the  contracting  parties,  and  when  it 


490  PRINCIPLES  OF  ECONOMICS. 

is  clear  that  governmental  regulation  will  remove  the 
evils  that  arise  from  such  inequality.  Economists  hold 
The  third  class  different  views  concerning  the  expediency 
of  functions.  0f  some  legislation  in  regulation  of  com- 
petition, because  they  differ  as  to  the  extent  of  the 
inequalities  between  the  two  parties,  or  because  they 
doubt  the  efficiency  of  the  remedies  proposed,  or  because 
they  believe  that  the  contemplated  restrictions  will  have 
worse  social  effects  than  the  evils  which  it  is  desired  to 
cure.  Wise  factory  legislation  and  a  reasonable  control 
of  railroads  and  local  monopolies  are  favored  by  most 
economists. 

§  333.    Economists  are  not  inclined  to  favor  bounties, 

subsidies,  and  protective  duties.     Such  measures  mean 

aiding  some  industries  at  the  expense  of  all 

The  fourth  °  r 

class  of  taxpayers  or  consumers.     This  can  be  justi- 

fied only  when  the  public  necessity  or  social 
utility  of  the  favored  industry  is  extremely  great.  More- 
over, such  a  policy  tends  to  corrupt  politics,  and  to 
produce  many  abuses.  On  the  other  hand,  many  busi- 
ness men  who  stoutly  oppose  governmental  regulation 
of  corporations,  of  the  labor  contract,  or  of  freight  rates, 
on  the  ground  that  government  ought  not  to  meddle 
with  private  business,  are  very  willing  to  favor  bounties, 
subsidies  to  railroads,  and  protective  duties.  Concerning 
the  question  of  franchises,  it  may  be  said  that  economists 
hold  that  valuable  privileges  of  this  sort  should  be  paid 
for  by  the  individuals  who  receive  them,  while  the 
public  should  be  guaranteed  good  service  at  reasonable 
rates. 


THEORIES  OF  GOVERNMENTAL  FUNCTIONS.     VA 

§  334.  The  last,  class  of  governmental  fund  ions 
includes,  as  was  shown,  two  fairly  separate  classes  of 
useful  public  works.  Roads,  sewers,  harbor  The  fifth  class 
improvements,  the  publication  of  statistics,  of  f unctions- 
the  maintenance  of  light-houses  and  dikes,  the  coinage 
of  money,  sanitary  precautions,  and  public  education 
are  undertakings  in  which  private  enterprise  has  been 
proven  to  be  inadequate  or  productive  of  bad  results. 
No  one  but  anarchists  and  extreme  individualists  would 
object  to  the  policy  of  our  present  government  in  pro- 
viding these  public  works.  But  there  is  a  doubt  as  to 
the  expediency  of  having  the  government  undertake 
other  works  that  might  conceivably  be  left  to  private 
enterprise. 

It  is  said  that  the  gas  and  electric  light  industries, 
steam  and  street  railroads,  and  the  telegraph  and  ex- 
press businesses  are  suitable  fields  for  private  Governmental 
enterprise,  and  that  governments  should  industrial 
not  interfere  with  them.  The  student  will  ^"takingi. 
understand  that  the  question  of  the  advisability  of  pub- 
lic or  private  management  of  these  industries  is  solely  a 
question  of  social  utility.  This  will  be  made  clear  by  con- 
sidering that  many  people  who  oppose  public  ownership  of 
these  enterprises  favor  the  national  ownership  of  the  post 
office  and  municipal  ownership  of  water  works.  Those 
who  favor  public  enterprise  in  these  fields  do  so  because 
experience  has  shown  that  all  these  industries  inevitably 
become  monopolies,  and  they  prefer  public  to  private 
monopoly.  Those  who  oppose  such  a  policy  must  admit 
the  tendency  to  monopoly  in  these  lines  of  business,  and 


492  PRINCIPLES   OF  ECONOMICS. 

must  show  that  private  management,  either  with  or 
without  governmental  control,  can  assure  the  best  re- 
sults to  society.  As  a  matter  of  fact,  all  arguments 
consciously  or  unconsciously  come  to  precisely  this  posi- 
tion sooner  or  later. 


LITERATURE   ON   CHAPTER  XVI. 

General  References  :  Andrews,  Institutes  of  Economics,  14-22 ; 
Adams,  Relation  of  the  State  to  Industrial  Action  ;  Bastable, 
Public  Finance,  37-53 ;  Cairnes,  Essays  on  Political  Economy, 
232-264 ;  Ely,  Economics,  249-307,  Socialism  and  Social  Reform, 
253-354;  Farrer,  The  State  in  its  relation  to  Trade;  Hadley, 
Economics,  8-23,  390-403 ;  Hoffman,  The  Sphere  of  the  State  ; 
Jevons,  The  State  in  its  relation  to  Labour  ;  Mill,  Principles  of 
Political  Economy,  Book  V.  Chaps.  1  and  11,  On  Liberty;  Sidg- 
wick,  Political  Economy,  404-497,  Elements  of  Politics,  Chaps. 
4,  9,  10  ;  Smith,  Wealth  of  Nations,  Book  IV.  Chap.  9,  end  of 
chapter,  Book  V.  Chap.  1,  especially  Part  III. ;  Willoughby,  The 
Nature  of  the  State,  309-350;  Wilson,  The  State,  637-668. 

References  on  Extreme  Individualism:  Donisthorpe,  Indi- 
vidualism, A  System  of  Politics ;  Mackay,  A  Plea  for  Liberty,  A 
Policy  of  Free  Exchange  ;  Spencer,  The  Man  versus  the  State; 
Sumner,  What  Social  Classes  Owe  Each  Other. 

References  to  Discussion  of  Doctrines  of  Economists  : 
Cohn,  History  of  Political  Economy;  Cossa,  Introduction  to 
the  Study  of  Political  Economy;  Ingram,  History  of  Political 
Economy. 


PUBLIC  EXPENDITURES.  493 


CHAPTER  XVII. 

GOVERNMENTAL   EXPENDITURES   AND   REVENUES. 

I.   Public  Expenditures. 

§  335.  In  order  that  governments  may  exercise  the 
functions  that  have  just  been  described,  it  is  necessary 
that  they  should  be  able  to  command  the 

Public  Finance. 

men  and  the  commodities  that  are  con- 
stantly required  for  the  public  service.  In  modern 
countries  governments  supply  these  needs  by  collecting 
sums  of  money  that  can  be  used  for  hiring  public  offi- 
cials and  purchasing  commodities.  The  economist  is 
obliged  to  study  with  care  the  manner  in  which  personal 
services  or  material  objects  are  thus  secured  for  the 
satisfaction  of  the  public,  or  collective,  wants  of  society. 
This  branch  of  study  is  of  such  importance  that  it  has 
often  been  accorded  almost  the  position  of  an  indepen- 
dent science,  and  the  name  Public  Finance  has  been  ap- 
plied to  that  department  of  economic  investigation  which 
deals  with  governmental  expenditures  and  revenues. 

§  336.  The  objects  of  governmental  expenditure  are 
so  multifarious  that  it  is  extremely  difficult  to  group 
them  in  a  simple  and  logical  classification,  „,    „   „ 

r  '    Classification 

but  a  brief  survey  of  the  various  functions  of  public  ex- 
enumerated  in  the  last  chapter  will  indicate 
the  chief  items  of  public  expense.     In  the  limited  space 


494  PRINCIPLES   OF  ECONOMICS. 

at  our  disposal  it  will  be  advisable  to  attempt  nothing 
more  in  the  way  of  general  classification,  and  to  devote 
our  attention  to  the  expenditures  of  our  national,  state, 
and  local  governments  in  the  United  States. 
mj_.  In   1890   the   federal    census    stated   the 

Total  expend- 
itures in  the     total  expenditures  of  our  national,  state,  and 
United  States.   .        .  .,  ,, 

local  governments  as  follows  :  — 


National  government,  including  postal  service  .     . 
States  and  territories,  except  for  public  common 

schools 

Counties,  except  for  public  common  schools     .     . 
Municipalities,  except  for  public  common  schools 

Public  common  schools 

Total 


$352,218,614 

77,105,911 
114,575,401 
232,988,592 
139,065.537 


§915,954,055 


It  will  be  seen  that  the  expenditures  of  the  federal 
government  formed  thirty-nine  per  cent  of  the  total, 
and  that  those  of  the  states  and  territories  amounted 
to  only  nine  per  cent ;  while  local  expenditures,  includ- 
ing those  for  public  schools,  made  up  fifty-two  per  cent 
of  the  total  cost  of  government.  In  1850,  the  expenses 
for  national  purposes  amounted  to  forty-nine  per  cent  of 
the  total  outlay,  and  it  is  evident  that  there  has  been 
a  marked  increase  since  that  time  in  the  demands  which 
local  governments  have  made  upon  the  public  resources. 
The  same  tendency  can  be  observed  in  other  countries, 
and  such  a  preponderance  of  local  expenditures  is  due 
to  the  increasing  number  and  cost  of  the  services  which 
the  local  political  units  render  to  their  citizens.  The 
states  occupy  a  position  of  relatively  minor  financial 
importance ;  but,  in  some  cases,  there  has  been  a  marked 


PUBLIC  EXPENDITURES.  495 

increase  in  their  expenditures  in  recent  years.  Thus,  in 
New  York,  the  state  government  expended  $13,070,881 
in  1890,  and  .1520,020,022  in  1898.  This  increase  has 
been  due  to  the  assumption  of  new  branches  of  public 
administration,  such  as  the  care  of  the  insane ;  and 
other  states  arc  manifesting  a  disposition  to  enlarge 
their  spheres  of  activity. 

During  the  fiscal  year  1897,1  the  net  ex-  Federal  ex- 
peuditures  of  our  federal  government  were 
as  follows  :  — 


Interest  on  public  debt 

Pensions    

Departments  of  War  and  Navy  2 

Deficiency   of  postal   revenue   and   other  postal 

expenses    

All  other  expenses 

Total 


$37,791,110 

141,053,165 

72,104,497 

13,621,274 
101,204,113 


$365,774,159 


During  this  year  the  Post  Office  Department  spent 
196,286,000,  but  $82,665,000  of  this  amount  was  met  by 
the  postal  revenues.  Only  the  deficiency  of  $13,621,000 
is  included  in  this  statement  of  the  net  expenditures. 
The  first  three  items  in  our  table  represent  almost  en- 
tirely our  expenses  for  military  purposes,  past  and  pres- 
ent,3 and  they  amount  in  the  aggregate  to  $250,948,000. 

1  This  year  was  selected  in  preference  to  1898,  since  the  conditions 
then  prevailing  were  more  nearly  normal  than  those  attending  the  period 
of  the  war  with  Spain. 

-  This  is  exclusive  of  $13,682,000  expended  under  the  War  Department 
for  improvement  of  rivers  and  harbors.  This  sum  is  included  in  the  last 
item  of  the  table. 

;i  Of  course  a  part  of  the  public  debt  has  been  contracted  in  recent 
years  for  other  than  military  expenses,  and  the  interest  thus  accruing 


496 


PRINCIPLES   OF  ECONOMICS. 


This  is  more  than  twice  the  total  expenditures  of  the 
federal  government  for  all  other  purposes.1  The  amount 
paid,  in  1897  for  pensions  alone  was  greater  than  the 
entire  cost  of  our  public  schools  in  the  year  1890. 
Reckless  pension  legislation  has  increased  the  outlays 
for  this  purpose  from  $80,288,000  in  the  year  1888  to 
$147,452,000  in  1898.  The  last  item  in  our  table  repre- 
sents the  expense  of  administering  justice,  improving 
rivers  and  harbors,  maintaining  Congress  and  the  presi- 
dent, and.  conducting  the  departments  of  the  Treasury, 
Interior,  State,  Justice,  and  Agriculture. 

In  1890  the  total  expenditure  of  the  state  and  local 

governments     was     placed    by    the    census    at    about 

state  and  local  $569,000,000.     The  principal  objects  of  cx- 

expenditures.   pense  were  as  f0Hows  :  — 


All  educational  purposes 

Roads,  bridges,  and  sewers 

Construction  and  maintenance  of  public  buildings 

and  works 

Interest  on  public  debt 

Charities  and  gratuities 

Police 

Judicial  expenses 

Fire 

Penal  and  reformatory  institutions 

Lighting 


$145 

72, 

52. 
46. 
39, 
23 
18, 
16, 
12, 
11, 


,583,115 
262,023 

463,197 
649,139 
958,816 
934,376 
721,383 
423,820 
381,425 
363,780 


should  be  deducted  from  any  estimate  of  military  outlays.  Also  the  ex- 
penditures attributed  to  the  War  and  Navy  Departments  include  some 
minor  items  that  are  not  military  expenses.  But  it  is  not  possible  to 
separate  these  from  the  other  expenses  of  those  departments. 

1  In  this  respect  the  United  States  does  not  differ  from  other  countries, 
for  a  very  large  proportion  of  national  expenditures  is  everywhere  re- 
quired for  military  purposes  or  for  interest  on  public  debts  contracted 
principally  for  the  prosecution  of  wars. 


PUBLIC  EXPENDITURES.  497 

The  student  can  most  advantageously  supplement  these 
general  data  taken  from  the  federal  census,  by  a  study 
of  the  financial  reports  of  his  town,  county,  or  state. 
Indeed,  such  investigation  should  accompany  class-room 
work  with  both  public  expenditures  and  public  revenues. 
§  337.  In  all  countries  governmental  expenditures  are 
increasing  in  a  marked  degree.  Between  1830  and  1890, 
the   national   expenditures    of   the    various  _       _uu  ^ 

1  The  growth  of 

states  of  Europe  rose  from  four  to  eleven  public  ex- 
dollars  per  capita,  and  the  rate  of  growth 
was  even  more  rapid  in  the  later  than  in  the  earlier 
decades  of  that  period.  In  the  United  States  federal 
expenditures  rose  from  $1.42  to  $5.07  per  capita 
between  1840  and  1890,  and  the  budgets  of  our  local 
political  units  have  shown  a  constant  tendency  to 
increase. 

This  world-wide  phenomenon  has  been  viewed  with 
great  alarm  by  many  persons,  who  have  attributed  it 

to  profusion  or  corruption  in  governmental 

Its  causes. 

affairs.  But  two  considerations  need  to  be 
borne  in  mind  by  the  student  of  financial  problems. 
First,  even  if  per  capita  expenditures  have  become 
larger,  it  is  certain  that  wealth  also  has  increased ;  so 
that  the  greater  public  outlay  may  not  represent  an  in- 
creased burden  relatively  to  the  resources  of  the  people. 
In  the  United  States,  at  any  rate,  it  is  quite  probable 
that  such  has  been  the  case.  In  the  second  place  it  is 
certain  that  the  larger  expenditures  are,  in  considerable 
measure,  the  result  of  an  enlargement  of  the  functions 
that  governments  have  been  called   upon   to   perform. 

32 


498  PRINCIPLES  OF  ECONOMICS. 

This  fact  can  be  most  clearly  seen  in  the  case  of  local 
expenditures,  where  the  increase  has  been  very  marked. 
Nevertheless  it  cannot  be  denied  that  probably  all  gov- 
ernments are  imposing  upon  their  citizens  heavier  bur- 
dens than  would  be  required  under  a  wiser  or  more 
honest  management  of  public  affairs. 


II.    Public  Revenues. 

§  338.    Public  revenues  are  as  difficult  to  classify  as 

public   expenditures   have    proved   to   be,1  but   it   will 

classification    suffice  for  our  present  purpose  to  recognize 

enues.  six  main  branches  of  income. 

§  339.    The  first  branch  of  income  includes  revenues 

derived  from  domains  and  industries.     Public  domains 

i.  Revenue     are  lands  that  are  retained  in  the  posses- 

from  domains  sjon  0f   ^ne  government.     Many  European 

and  public  in-  °  J  l 

dustries.  states  possess  agricultural  lands  that  are 
cultivated  under  public  management  or  leased  to 
citizens.  Mines,  also,  sometimes  form  a  part  of  the 
domain,  and  are  operated  in  a  similar  manner ;  while 
the  need  of  a  careful  husbanding  of  forest  resources 
has  led  to  the  public  ownership  and  management  of 
forests.  In  some  of  the  states  of  the  German  Empire 
the  income  from  domains  and  forests  forms  from  seven 
to  fifteen  per  cent  of  the  total  revenues.  In  the  United 
States  a  different  policy  has  been  followed.     Our  federal 

1  For  the  most  recent  suggestions  upon  the  subject  see  Seligman, 
Essays  in  Taxation,  265-304 ;  Plehn,  Public  Finance,  f>9-82 ;  Adams, 
Science  of  Finance,  219-229  ;  Hapley,  Economics,  447-449. 


PUBLIC  REVENUES.  499 

government  has  possessed  an  enormous  public  domain 
(§  7),  but  this  has  been  allowed  to  pass  largely  into 
private  ownership,  upon  the  theory  that  the  resources 
of  the  country  would  be  most  rapidly  developed  in  this 
way.  Receipts  from  the  sale  of  public  lands  now  form 
but  an  insignificant  item  in  the  federal  revenues. 

Governments  conduct  many  kinds  of  public  industries, 
such  as  water  works,  gas  and  electric-lighting  plants, 
street  and  steam  railways,  and  postal  and  pUMic  indus- 
telegraph  systems.  In  some  cases  these  trles- 
are  operated  at  a  loss,  as  is  the  case  with  the  postal 
service  of  the  United  States,  where  there  is  an  annual 
deficit  of  ten  or  twelve  million  dollars  (§  336).  In 
other  instances  a  profit  is  derived  from  these  industries, 
as  in  Prussia,  where  the  railroads  yield  a  surplus  of 
about  $ 30,000,000  annually,  or  in  England,  France,  and 
Germany,  where  a  substantial  net  revenue  is  secured 
from  the  post  office.  In  general  it  may  be  said  that 
these  industries  were  not  brought  under  public  man- 
agement primarily  for  the  sake  of  revenue,  since  vari- 
ous social  or  political  considerations  contributed  to  bring 
about  this  result.  Sometimes  it  was  desired  to  avoid 
the  evils  of  private  monopoly,  at  others  the  purpose 
was  to  extend  the  facilities  offered  by  these  industries 
more  widely  than  private  enterprise  could  or  would 
do.  When  it  has  seemed  desirable  to  encourage  the 
widest  possible  use  of  any  of  these  commodities  or 
services,  all  thought  of  revenue  has  been  deliberately 
renounced,  and  the  prices  exacted  have  been  reduced 
to  the  lowest  possible  figure.     This  is  true  of  the  water 


500  PRINCIPLES   OF  ECONOMICS. 

supply  of  large  cities  and  of  the  postal  service  in  the 
United   States.     In  general  there  is  a  strong  tendency 
on  the   part  of   the   public  to  demand   lower   charges 
rather  than  a  large  revenue  from   these  undertakings. 
In  a  few  cases  governments  conduct  business  under- 
takings purely  as  a  means  of  raising  revenues.     Such 
Fiscal  mon-     enterprises  are  called  fiscal  monopolies,   and 
opoiies.  are   foun(j     in   Some   countries   of    Europe. 

Thus  France  monopolizes  the  manufacture  of  tobacco, 
and  endeavors  to  derive  from  this  source  the  largest 
possible  monopoly  profits.  This,  however,  is  merely 
a  substitute  for  internal  taxes  upon  tobacco,  which,  it 
was  found,  could  not  be  made  equally  effective  as  a 
source  of  revenue.  In  such  cases,  therefore,  we  are 
dealing  with  what  is  really  a  form  of  taxation. 

In    many    American   towns    and   cities   the  work    oi 
supplying  the   people   with   water,   transportation,  and 
semi-pubiic  in-  lighting  facilities  has  been  left  to  privato 
dustries.  corporations,  which  have  been  given  fran- 

chises to  use  the  streets  in  the  conduct  of  their  enter- 
prises. All  of  these  industries,  we  have  seen  (§  204), 
are  certain  to  prove  natural  monopolies ;  and,  as  a 
rule,  are  likely  to  become  very  profitable.  Moreover, 
they  are  virtually  performing  a  public  function,  which 
the  municipality  concedes  to  them  instead  of  reserving 
to  itself.  In  all  such  cases,  therefore,  the  same  ques-1 
tions  arise  that  confront  any  government  when  it  un- 
dertakes a  similar  enterprise :  Shall  a  large  revenue 
be  secured  by  requiring  the  private  corporations  to 
make    adequate    payment    for   the    valuable   franchises 


PUBLIC  REVENUES.  501 

granted  to  them  ;  or  shall  the  companies  be  compelled 
to  fix  prices  at  a  low  rate  that  will  encourage  the  widest 
possible  use  of  the  services  supplied?  In  the  past, 
American  municipalities  have  failed  to  attain  either 
of  these  ends,  and  have  given  away  franchises  without 
exacting  any  adequate  return  for  the  privilege  of  ex- 
ercising these  semi-public  functions.  Such  a  policy 
amounts  to  a  shameful  squandering  of  public  resources. 
If  a  wiser  course  is  followed  in  the  future,  our  cities 
can  defray  a  large  part  of  their  expenses  out  of  the 
receipts  from  public  franchises. 

§  340.  Fees  constitute  a  second  form  of  public  rev- 
enue. Governments  are  constantly  performing  many 
services  for  particular  individuals  who  re- 
ceive thereby  a  special  benefit.  It  is  con- 
sidered just  to  demand  from  such  citizens  the  payment 
of  a  part  or  the  whole  of  the  expense  which  is  incurred 
in  the  performance  of  such  services,  and  fees  are 
charged  upon  such  occasions.  We  may,  therefore, 
define  a  fee  as  "  a  payment  to  defray  the  cost  of  each 
recurring  service  undertaken  by  the  government  pri- 
marily in  the  public  interest,  but  conferring  a  measur- 
able special  advantage  on  the  fee-payer." 1  Probate 
fees,  court  charges,  fees  for  recording  deeds  and  mort- 
gages or  for  issuing  marriage  licenses,  are  common 
examples  of  this  form  of  public  revenue.  If  the  sums 
exacted  exceed  the  cost  of  performing  the  service, 
then  the  surplus  over  the  cost  is  theoretically  a  tax 
upon   a   special  class   of  persons,  viz.:   those  who   are 

1  Seligmax,  Essays  in  Taxation,  304. 


502  PRINCIPLES   OF  ECONOMICS. 

called  upon  to  pay  the  fees.  In  practice,  however, 
revenues  of  this  class  are  called  fees  irrespective  of 
the  precise  relation  between  the  alnount  collected  and 
the  cost  of  the  service. 

§  341.   A  third  branch  of  revenue  comprises  receipts 
of  a   very  miscellaneous  character.     Fines  and  penal- 

3.  Misceiiane-  ties  form  &  small  item  of  income.     Some- 
ous  revenues,  tirues   property  reverts  to   the   government 

upon  the  failure  of  heirs.  In  a  number  of  countries 
public  lotteries  are  still  maintained,  and  are  made  to 
yield  considerable  income.  In  1898  Italy  secured 
about  $13,000,000  from  this  source.  Finally,  govern- 
ments are  occasionally  the  recipients  of  gifts.  These 
usually  are  for  some  specific  purpose,  as  a  park,  a 
library,  or  a  schoolhouse,  and  do  not  form  a  part  of 
the  general  public  revenues. 

§  342.    A  fourth  form    of   revenue   has  become  very 
important  in  the  finances  of  American  municipalities, 

4.  special  as-  but  has    been   less    often  utilized  in  other 
sessments.       countries.     This  is  the  special  assessment, 

which  may  be  defined  as 1  "a  compulsory  contribution, 
levied  in  proportion  to  the  special  benefits  derived,  to 
defray  the  cost  of  a  specific  improvement  to  property 
undertaken  in  the  public  interest."  When  new  streets 
are  opened  or  old  ones  are  paved,  when  drains  and  sewers 
are  constructed,  or  when  public  squares  or  parks  are 
laid  out,  the  owners  of  adjoining  real  estate,  which  is 
enhanced  in  value  as  a  result  of  such  improvements,  may 
justly  be  called  upon  to  pay  a  part  or  even  the  whole  of 

1  Seligman,  Essays  in  Taxation,  283. 


PUBLIC  REVENUES.  503 

the  cost  of  such  public  works.  The  entire  community 
may  be  interested  in  such  improvements  ;  and,  accord- 
ingly, commonly  defrays  a  part  of  the  expense  out  of  its 
general  revenues.  But  the  owners  of  abutting  real 
estate  derive  a  special,  measurable  benefit  from  such 
public  works,  and  should  in  justice  bear  a  part  of  the 
burden  thus  incurred.  Special  assessments  have  become 
an  important  and  probably  a  permanent  feature  of 
American  municipal  finance,  since  they  have  proved 
well  adapted  to  the  needs  of  young  and  rapidly  growing 
cities.  In  1891  the  statistics  of  twenty-five  of  our  larg- 
est cities  showed  that  receipts  from  special  assessments 
amounted  to  119,780,000,  which  was  slightly  more  than 
eighteen  per  cent  of  the  sums  raised  by  general  taxes 
for  that  year. 

§  343.  Public  loans  must  be  included  in  any  state- 
ment of  the  forms  of  governmental  revenue.  Of  course 
the  receipts  secured  by  public  borrowing  s  p,,,,^ 
are  of  a  temporary  character,  and  carry  with  loans- 
them  the  necessity  of  ultimate  repayment.  But  genera- 
tions and  even  centuries  sometimes  elapse  before  such 
debts  are  extinguished,  so  that  loans  may  assume  a  rela- 
tively permanent  character.  The  forms  of  public  bor- 
rowing are  many,  and  it  will  be  possible  to  mention  here 
only  those  which  are  of  most  importance  in  the  United 
States.  Treasury  notes  are  often  issued  to  meet  tem- 
porary deficits.  These  notes  are  to  remain  outstanding 
until  they  can  be  redeemed  out  of  the  proceeds  of  cur- 
rent taxes  or  from  the  sale  of  bonds.  Government 
bonds   are   obligations   that  run  for  a  term  of   years, 


504  PRINCIPLES   OF  ECONOMICS. 

being  redeemable  at  a  certain  fixed  date.  They  meet 
the  demands  of  lenders  who  desire  to  secure  a  relatively 
permanent  investment.  When  such  bonds  mature,  they 
are  often  re-funded,  i.  e.  redeemed  by  contracting  new 
loans,  frequently  at  a  lower  rate  of  interest.  Finally, 
governments  may  contract  forced  loans  by  issuing  a 
paper  currency,  as  was  done  during  our  Civil  War.  By 
this  means  the  property  of  citizens  is  seized  and  applied 
to  the  public  service.  It  is  said  that  governments  may 
advantageously  borrow  in  this  manner  without  having 
to  pay  interest  upon  their  debt.  But  any  possible  sav- 
ing in  this  direction  is  many  times  outweighed  by  the 
disastrous  results  of  a  paper-money  policy  (§  158). 

Public  loans  are  contracted  for  various  purposes.     In 

cases  of  great  emergency,  as,  for  instance,  the  outbreak 

The  objects     of   a    war,    governments   have   resorted   to 

for  which       borrowing  in  order  to  secure  the  large  sums 
loans  are  con-  °  ° 

tracted.  that  are  suddenly  demanded.    Such  a  course 

throws  the  immediate  burdens  upon  the  people  who  in- 
vest in  public  securities,  and  taxpayers  are  for  the  time 
being  relieved.  The  ultimate  burdens  devolve  upon 
future  taxpayers,  who  are  called  upon  to  supply  the 
funds  required  for  paying  the  principal  and  interest  of 
the  debt.  A  second  occasion  for  borrowing  arises  when 
some  public  work  is  to  be  undertaken  or  a  public  indus- 
try is  to  be  established.  For  these  purposes  funds  can 
be  secured  most  easily  by  borrowing,  since  great  hard- 
ships would  arise  from  the  attempt  to  raise  all  the  nec- 
essary money  by  current  taxation.  In  case  the  proceeds 
of  the  loans  are  invested  in  some  productive  industry 


PUBLIC  REVENUES.  505 

that  will  yield  a  clear  income  sufficient  to  pay  both  in- 
terest and  principal,  the  debt  contracted  is  offset  by 
valuable  assets,  and  forms  no  real  burden.  With  all 
other  public  works,  which  yield  either  no  money  income 
or  less  than  is  sufficient  to  make  complete  provision  for 
the  debt,  it  is  highly  important  to  remember  that  such 
undertakings  constitute  a  real  financial  burden,  even 
though  they  are  plainly  seen  to  be  beneficial  to  society 
in  the  highest  degree.  Finally,  governments  have  re- 
sorted to  borrowing  when  the  existing  taxation  has  failed 
to  supply  the  funds  needed  for  current  expenditures. 
When  such  a  deficit  is  due  to  accidental  and  temporary 
causes,  the  loans  thus  contracted  may  be  repaid  out  of 
the  surplus  revenues  of  subsequent  years,  and  no  harm 
may  be  done.  But  sometimes  governments  have  con- 
tinued to  make  up  recurrent  deficits  by  means  of  con- 
tinued borrowing.  Such  a  policy  merely  postpones  the 
evil  day  when  either  bankruptcy  or  heavy  increases  of 
taxation  will  become  inevitable,  and  throws  upon  the 
future  a  burden  that  ought  to  be  borne  by  the  present. 

§  344.  Taxes  constitute  the  final  and  most  important 
branch  of  public  revenue.  They  may  be  defined  as 
compulsory  contributions  exacted  by  govern-  6.  Taxes. 
ments  from  persons  within  their  jurisdictions,  for  the 
purpose  of  defraying  general  public  expenses.  The  at- 
tention of  the  student  should  be  called  to  the  important 
points  of  difference  between  taxes  and  some  of  the  forms 
of  revenue  previously  described.  It  was  seen  that  a  fee 
is  exacted  only  from  persons  for  whom  the  government 
performs  some  special  service,  and  that  special  assess- 


506  PRINCIPLES  OF  ECONOMICS. 

ments  are  collected  from  people  whose  property  has  been 
directly  and  measurably  enhanced  in  value  as  a  result 
of  some  public  improvement.  In  both  cases  the  reason 
and  justification  for  such  exactions  are  to  be  found  in 
the  direct  and  measurable  benefits  conferred  upon  par- 
ticular persons.  In  the  case  of  taxes,  however,  the  cir- 
cumstances are  entirely  different.  The  actions  of  the 
government  in  protecting  persons  and  property  and  in 
ministering  to  the  general  public  welfare  in  other  ways 
do  not  confer  upon  any  particular  citizen  a  distinct  and 
measurable  benefit.  They  are  of  the  highest  importance 
to  all  people ;  but  they  confer  a  common  benefit  upon 
all,  and  it  is  impossible  to  compute  the  precise  advan- 
tages that  accrue  to  individual  citizens.  For  this  reason 
all  persons  within  the  jurisdiction  of  the  government 
may  be  called  upon  to  contribute  to  its  support,  and 
taxes  are  properly  defined  as  compulsory  contributions 
designed  to  meet  the  general  public  expenses. 

In  former  times  governments  were  expected  to  depend 

upon  other  means  of  support,  and  to  call  for  taxes  only 

Position  of       in  cases  of  special  emergency.   The  king  was 

S^v?     suPPosed  " to  live  of  his  own  "  that  is>  to 
nues.  support  his  establishment  with  the  revenues 

from  his  domains  and  from  certain  fiscal  prerogatives. 
Only  in  case  of  war,  or  upon  some  other  extraordinary 
occasion,  was  he  expected  to  call  upon  his  subjects  for 
contributions  of  a  part  of  their  property.  Long  after 
taxation  had  become  a  usual  and  regular  source  of  reve- 
nue, writers  upon  finance  continued  to  speak  of  it  as  an 
extraordinary  and  occasional  expedient.     In  this  coun- 


PUBLIC  REVENUES.  507 

try,  the  Assembly  of  Pennsylvania,  as  late  as  1755,  ad- 
vanced the  following  theory  of  taxation  in  that  province. 
Originally  the  government  was  expected  to  find  support 
from  the  proceeds  of  quit  rents  from  the  lands  of  the 
province,  which  belonged,  of  course,  to  the  proprietors. 
Then  licenses  and  fees  were  "  pitched  upon  "  for  a  second 
means  of  support.  "  But  Governors,  a  Sort  of  Officers 
not  easily  satisfied  with  Salary,  complaining  that  these 
were  insufficient  to  maintain  suitably  the  Dignity  of 
their  Station,  occasional  Presents  were  added  from  Time 
to  Time  ;  and  those  at  Length  came  to  be  expected  as 
of  Right,  which,  if  conceded  to,  and  established  by,  the 
People  would  have  made  a  third  Support."  But  in  all 
countries  taxation  has  now  become  the  chief  source  of 
public  revenue  ;  so  much  so,  in  fact,  that  we  are  inclined 
to  forget  or  neglect  the  other  forms  of  income. 

The  justification  for  the  action  of  government  in  com- 
pelling its  citizens  to  contribute  to  its  support  is  to  be 
found  in  the  necessity  of  maintaining  some 

.  .  °  The  justifica- 

agency  through  which  collective  aetion  for  uonof 
public  purposes  may  be  secured.  If  the 
necessity  and  usefulness  of  having  a  government  are  ad- 
mitted, then  the  duty  of  maintaining  it  is  established  ; 
and  experience  has  shown  that  taxation  is  an  indispen- 
sable means  of  support.  As  a  government  may  properly, 
in  certain  circumstances,  demand  the  lives  of  its  citizens, 
so  also  may  it  command  their  fortunes  for  the  public  ser- 
vice. But  this  justification  of  taxation  can  be  urged  only 
in  behalf  of  taxes  levied  for  useful  and  necessary  objects 
of  expenditure,  and  applied  economically  and  honestly  to 


508  PRINCIPLES   OF  ECONOMICS. 

such  purposes.  Unless  these  conditions  are  fulfilled, 
taxation  becomes  virtually  robbery,  even  though  prac- 
tised under  the  guise  of  law. 

§  345.    From  the  beginning  to  the  end  of  his  study  of 

this  subject  the  student  is  confronted  by  the  question, 

What  constitutes   "justice   in   taxation  ?     A 

What  consti-  J 

tutes  justice  in  commonly  accepted  theory  in  the  United 
States  has  been  that  the  taxes  demanded 
from  each  citizen  should  be  proportioned  to  the  benefits 
that  he  derives  from  the  protection  and  other  services 
rendered  by  his  government.  But  this  answer  is  wholly 
unsatisfactory  because  it  is  impossible  to  measure  in  any 
tangible  way  the  benefits  that  any  individual  receives 
from  most  forms  of  governmental  activity.  Whenever 
such  a  calculation  of  benefits  is  possible,  the  persons  who 
receive  a  special  benefit  are  called  upon  to  defray  a  part 
or  the  whole  of  the  cost  of  the  service  rendered,  as  is  the 
case  with  fees  or  special  assessments.  But  taxes  are 
levied  for  defraying  general  expenses,  in  which  no  meas- 
urement of  particular  benefits  is  possible.  Moreover,  if 
such  a  calculation  could  be  made,  it  might  be  found  that 
the  poor,  the  weak,  and  the  defenceless  receive  greater 
benefits  than  the  rich  and  the  strong  derive  from  the 
action  of  the  government  in  protecting  persons  and  prop- 
erty ;  so  that  this  theory  would  necessitate  such  an 
apportionment  of  taxes  as  would  throw  the  burden  of 
public  expenditures  upon  the  weakest  members  of 
society. 

A  more  satisfactory  theory  is  that  each  citizen  should 
share  in  the  public  burdens  according  to  his  ability  to 


PUBLIC  REVENUES.  509 

bear  them,  and  that  faculty  should  be  the  basis  for  the 
apportionment  of  taxes.  Within  a  family,  a  church,  or 
a  fraternal  organization  this  principle  is  fol-  The  "faculty 
lowed ;  and  each  person  is  expected  to  con-  Xhtor^:' 
tribute  according  to  his  ability  whenever  the  attempt  is 
made  to  apportion  common  burdens  upon  a  just  basis. 
But  this  theory  gives  us  merely  a  very  general  principle 
whose  application  is  somewhat  difficult,  for  it  is  not  easy 
to  determine  a  perfect  method  of  measuring  each  person's 
faculty,  or  ability.  Such  a  measure  cannot  be  found  in 
a  person's  expenditures,  because  the  possessors  of  large 
incomes  do  not  consume  proportionately  more  than  peo- 
ple of  moderate  means.  What  a  person  consumes  may 
be  a  measure  of  his  necessities  instead  of  his  ability,  as 
can  be  seen  by  considering  the  case  of  a  man  who  has  a 
family  to  support  out  of  a  moderate  or  small  income. 
Property  is  often  considered  a  fair  practical  criterion  of 
a  taxpayer's  ability,  and  is  certainly  a  better  standard 
than  expenditure  can  ever  be.  But  such  a  measure  is 
far  from  perfect.  All  property  is  not  equally  productive, 
and  some  of  it  may  be  unproductive  or  even  a  positive 
burden  upon  the  owner.  Besides  this,  many  men  who 
have  little  accumulated  wealth  receive  wages  and  salaries 
from  their  labor  or  professional  services,  and  are  able  to 
pay  much  heavier  taxes  than  their  property  would  in- 
dicate. Finally,  revenue  has  been  suggested  as  the 
proper  measure  of  faculty.  This  is  probably  superior  to 
property,  but  is  not  entirely  unexceptionable,  because 
revenue,  like  property,  is  not  a  uniform  and  invariable 
test.     In  the  first  place,  an  income  derived  wholly  from 


510  PRINCIPLES  OF  ECONOMICS. 

personal  exertions  does  not  indicate  the  same  ability  that 
an  equal  revenue  derived  from  invested  property  repre- 
sents. An  income  of  the  first  kind  terminates  when  the 
ability  to  labor  ceases,  so  that  its  recipient  must  save  a 
part  of  it  in  order  to  provide  for  the  future  ;  while  the 
man  who  possesses  a  funded  income  is  under  no  such 
necessity.  In  the  second  place,  ability  varies  with  the 
demands  made  upon  each  person's  resources.  Two  in- 
comes may  be  equal,  but  the  recipient  of  one  may  be  a 
single  man,  while  the  recipient  of  the  other  may  have 
an  expensive  family  to  support.  Under  such  circum- 
stances equal  incomes  do  not  indicate  equal  ability. 

But  even  if  a  perfect  measure  of  faculty  is  difficult  of 
attainment,  it  is  possible  to  secure  approximate  justice 

in  apportioning  the  burden  of  taxation.    Rev- 
The  practical  £  r  ° 

measurement  enue  is  a  better  measure  of  ability  than  any 
other  that  has  been  suggested,  and  some- 
thing may  be  done  to  correct  the  inequalities  that  may 
result  from  such  a  standard.  Funded  incomes  may  be 
taxed  more  heavily  than  those  derived  from  personal 
exertions.  This  can  be  accomplished  by  imposing  taxes 
upon  property  in  addition  to  taxes  upon  incomes.  Fur- 
thermore a  certain  minimum  sum  may  be  exempted  from 
the  operation  of  taxes  that  are  levied  directly  upon  rev- 
enue, and  a  rough  allowance  can  in  this  way  be  made  for 
the  demands  which  the  maintenance  of  a  family  makes 
upon  the  possessors  of  small  incomes. 

§  346.  Associated  with  the  problem  of  justice  in  tax- 
ation is  the  question  whether  the  tax-rate  should  be 
proportional  or  progressive.     A  tax  is  proportional  when 


PUBLIC  REVENUES.  611 

it  imposes  a  fixed. rate,  say  two  per   cent  of  the  value 
of  all  objects  assessed,  irrespective  of  the  total  amount 
of  the  property  or  income  of  each  tax-payer. 
Taxes    are    regressive   when   the    rate    in-  and  progres- 

,      P  .  .  sive  taxation. 

creases  as  tiie  amount  01  property  or  income 
taxed  decreases.  Thus  a  fixed  business  license  tax  of 
twenty  dollars  upon  all  retail  storekeepers  would  be 
regressive,  since  the  rate  of  taxation  would  increase  as 
the  size  of  the  business  decreased.  Finally,  taxes  are 
progressive  when  the  rate  increases  as  the  taxable  prop- 
erty or  income  increases.  Thus  a  progressive  income 
tax  may  impose  a  rate  of  one  per  cent  upon  incomes  of 
$1,000  or  less,  and  may  levy  higher  rates  upon  larger 
incomes. 

The  injustice  of  a  regressive  tax  must  be  evident  to 
all,  but  there  is  a  difference  of  opinion  concerning  the 
merits  of  proportional  and  progressive  tax-  conflict  of 
ation.  The  opponents  of  a  progressive  rate  °^iaion- 
denounce  it  loudly  as  a  measure  of  confiscation ;  but  it 
seems  probable  that  a  progressive  tax,  if  it  can  be  rigidly 
collected  from  the  larger  incomes,  corresponds  more 
nearly  than  a  proportional  tax  to  the  demands  of  justice. 
This  is  because,  as  income  increases,  ability  to  bear  pub- 
lic burdens  probably  increases  at  even  a  more  rapid  rate. 
A  tax  of  two  per  cent  may  mean  the  sacrifice  of  articles 
of  decency  and  necessity  for  a  man  who  must  support  a 
family  out  of  an  income  of  $500,  while  a  man  who  en- 
joys an  income  of  $10,000  will  feel  but  slightly  the  pay- 
ment of  a  tax  of  the  same  rate.  More  than  this,  the 
possession  of  a  large   income   gives  a  person  a  great 


512  PRINCIPLES   OF  ECONOMICS. 

advantage  in  the  acquisition  of  future  riches,  because  it 
is  the  first  thousand  dollars  of  a  fortune  that  is  hardest 
to  acquire,  since  wealth  begets  wealth.  Such  considera- 
tions seem  to  justify  a  moderate  increase  of  the  rate  of 
taxation  as  fast  as  the  property  or  income  increases. 
But  this  is  true  only  upon  the  condition  that  the  tax  is 
well  administered  and  rigidly  collected.  Great  practical 
difficulties  are  encountered  at  precisely  this  point.  In 
this  country  proportional  taxes  upon  property  or  income 
are  poorly  enforced,  and  fall  with  undue  weight  upon 
persons  of  small  or  moderate  means.  Until  we  have 
administrative  machinery  that  will  enable  us  to  reach 
large  fortunes  with  certainty,  progressive  taxation  would 
probably  serve  only  to  increase  the  inequalities  that  in- 
here in  our  existing  tax  systems.1 

§  347.  Writers  upon  finance  have  commonly  made 
a  distinction  between  direct  and  indirect  taxes.  The 
Direct  and  in-  former  are  said  to  be  levied  directly  upon 
direct  taxes.  £ne  person  who  has  to  bear  the  burden  of 
them ;  while  the  latter  are  collected  in  the  first  instance 
from  people  who  add  the  amount  of  the  tax  to  the  prices 
of  commodities,  and  thus  shift  the  burden  upon  the 
ultimate  consumers  of  the  articles  taxed.  Income,  poll, 
property,  and  inheritance  taxes  are  called  direct ;  and 
customs  and  excise  taxes  are  considered  to  be  in- 
direct. In  some  cases  this  distinction  is  easily  drawn. 
Poll  or  inheritance  taxes  are  clearly  borne  by  the  very 

1  Tii  the  case  of  inheritance  taxes  it  may  ho  possible  to  enforce  with 
reasonable  certainty  a  progressive  rate,  since  we  have,  as  will  he  explained 
later,  fairly  satisfactory  methods  of  reaching  the  larger  estates. 


PUBLIC  REVENUES.  513 

persons  who  arc  called  upon  to  pay  them,  and  most  of 

our  customs  and  excise  taxes  ultimately  fall  upon  other 

people  than  those  from  whom  the  government  collects 

them.     But  other  cases  present  considerable  difficulty. 

If  I  import  goods  for  my  own  use,  without  resorting  to 

any  middleman,  the  customs  duty  will  fall  directly  upon 

me.     Again  it  is  often  difficult  to  determine  who  will 

ultimately  bear  the  burden  of  such  a  direct  tax  as  that 

upon  property.     In  some  cases  the  tax  can  be  shifted 

from  the  landlord  to  the  tenant,  as  will  be  explained  in 

another  place.     Such  facts  as  these  seem  to  deprive  this 

distinction  between  direct  and  indirect  taxes  of  strict 

scientific  validity. 

§  348.    If   taxes   are   honestly    and  wisely  expended, 

each  citizen  secures  a  large  return  for  the  sums  that  he 

contributes  for  the  support  of  the  govern-  The  "magic 

11  to  fund"  de- 

ment.    But  it  should  always  be  remembered  lusion. 

that  a  tax  is  a  deduction  from  the  wealth  of  the  com- 
munity and  a  burden  upon  the  taxpayers.  In  a  New 
England  town-meeting  the  truth  of  this  statement  is 
keenly  realized  whenever  public  expenditures  are  author- 
ized. But  when  the  operations  of  government  are  further 
removed  from  the  scrutiny  of  the  people,  and  revenues 
are  raised  by  customs  and  excise  duties  which  are  con- 
cealed in  the  prices  of  commodities,  or  by  corporation 
and  inheritance  taxes  which  are  less  felt  by  the  mass 
of  the  citizens,  there  is  danger  that  this  fact  may  be 
overlooked.  Some  ten  years  ago  the  federal  govern- 
ment annually  collected  surplus  revenue  that  amounted 
to  even  more  than  one  hundred  million  dollars,  and  the 

33 


514  PRINCIPLES   OF  ECONOMICS. 

evils  of  such  a  condition  were  not  clearly  recognized  by 
the  people.  The  thoughtful  student  hardly  needs  to  be 
told  that  taxation  can  furnish  the  government  with  no 
"  magic  fund,"  out  of  which  lavish  expenditures  can 
be  made  without  cost  to  anybody.  Yet  it  sometimes 
appears  that  this  delusion  is  more  commonly  entertained 
than  it  is  pleasant  to  believe.  The  only  result  of  popu- 
lar error  upon  this  point  must  be  extravagance  and  cor- 
ruption in  the  management  of  public  expenditures.  The 
correct  principle  for  the  guidance  of  all  governments  in 
matters  of  taxation  was  finely  stated  in  Pennsylvania's 
first  constitution,  which  was  adopted  in  1776.  Here 
it  is  declared  that  "  the  purpose  for  which  any  tax  is  to 
be  raised  ought  to  appear  clearly  to  the  legislature  to  be 
of  more  service  to  the  community  than  the  money  would 
be,  if  not  collected." 

III.    Taxation  in  the  United  States. 

§  349.   Our  federal  government   has  always  derived 
a  very  large  part  of  its  revenues  from  customs  duties, 
customs         These  are  taxes  imposed  upon  commodities 
taxes-  that  are  imported  into  a  country  or  exported 

from  it.  Since  the  Constitution  of  the  United  States 
provides  that  no  "  tax  or  duty  shall  be  laid  on  articles 
exported  from  any  State,"  the  federal  customs  duties 
have  been  imposed  only  upon  imports.1     Prior   to  the 

1  In  official  terminology  our  customs  revenues  include  tonnage  duties 
imposed  upon  shipping.  These  duties  brought  in  only  $844,095  in  1898, 
and  will  require  no  further  discussion.     But  see  §  41. 


TAXATION  IN  THE   UNITED  STATES.  515 

Civil  War  these  taxes  had  usually  furnished  in  times 
of  peace  nearly  the  whole  of  the  national  revenues. 
In  1860,  for  instance,  the  customs  receipts  amounted 
to  1*53,187,000,  while  the  total  revenues  were  only 
156,054,000.  Other  taxes  now  occupy  an  important 
place  in  our  federal  budget,  but  customs  duties  still 
yield  about  half  of  the  ordinary  receipts  from  taxation. 
We  have  already  seen  that  customs  duties  may  be 
either  specific  or  ad  valorem  (§  238).  The  latter  are 
open  to  the  objection  that  they  sometimes  specific  and 

ad  valorem 

lead  to  undervaluation  of  imports,  and  facili-  rates, 
tate  frauds  in  the  collection  of  revenues.  This  danger  is 
a  real  one  unless  the  imports  are  of  such  a  character 
that  the  customs-house  officials  can  readily  ascertain 
their  true  values.  Specific  duties  have  the  advantage 
of  being  easier  to  administer  and  more  difficult  to  evade, 
but  they  too  are  objectionable  in  one  important  respect. 
Goods  of  the  same  general  character  differ  widely  in 
value,  and  a  specific  duty  imposed  upon  an  entire  class 
of  imports  falls  with  undue  weight  upon  the  cheaper 
articles.  Sometimes  attempts  are  made  to  avoid  such 
regressive  taxation  by  classifying  commodities  of  the 
same  kind  according  to  their  value,  and  grading  the 
duties  accordingly.  But  this  classification  can  be  only 
of  a  rough  character,  and  it  introduces  the  principle  of 
ad  valorem  taxation.  Our  present  tariff  laws  employ 
both  kinds  of  duties,  but  the  measure  passed  in  1898 
greatly  increased  the  use  of  specific  rates. 

If  customs  taxes  are  to  yield  a  large  revenue,  the 
duties  must  be  imposed  upon  articles  of  general   con- 


•516  PRINCIPLES   OF  ECONOMICS. 

sumption.     The  bulk  of  our  customs  receipts  has  always 
come  from  a  few  such  commodities.     Thus,  in  1897,  the 

operation  of    duties  on  sugar,  molasses,  and  tobacco  yielded 

customs  taxes.  $62,300,000,  or  more  than  one  third  of 
the  total  customs  revenues.  With  each  commodity 
taxed  there  is  a  certain  rate  of  duty  that  will  bring  in 
the  largest  returns  to  the  treasury.  If  the  demand  is 
elastic,  as  in  the  case  of  luxuries,  the  rate  that  yields 
the  largest  revenue  will  be  relatively  low,  because  a 
higher  tax  diminishes  the  consumption  more  than  it 
increases  the  receipts  from  the  goods  actually  imported.1 
Articles  of  common  and  necessary  use,  however,  can 
usually  bear  higher  rates.  But  tariffs  that  impose  high 
duties  upon  necessities  are  objectionable  because  they 
burden  many  industries  by  taxing  heavily  the  raw 
materials  used,  and  because  they  rest  with  unequal 
weight  upon  the  masses  of  the  people.  A  family  with 
an  income  of  $10,000  cannot  consume  twenty  times  as 
much  of  these  commodities  as  twenty  families  with 
incomes  of  $500  each.  Therefore  a  tariff  constructed 
upon  this  principle  is  a  form  of  regressive  taxation. 

When  the  chief  purpose  of  the  tariff  is  to  protect 
certain  industries,  duties  are  sometimes  placed  at  such 

Protective       a  mS^  figure  as  to  prove  almost  prohibitory. 

duties.  Such  a  policy  sacrifices  revenue  for  the  sake 

of  protection.     In  this  country  most  of  our  protective 
duties  have  not  been  raised  sufficiently  to  prohibit  all 

1  The  student  who  lias  read  ( 'hapler  XII.  will  understand  that  customs 
taxes,  although  collected  from  Importers,  are  regularly  added  to  the 
prices  of  commodities  and  paid  l>y  consumers.  For  exceptions  to  this 
principle,  .sec  that  chapter. 


TAXATION  IN   THE    UNITED  STATES.  517 

importations,  but  they  have  often  served  to  decrease 
the  receipts  from  certain  commodities.  Another  effect 
of  protective  duties  is  that  they  tend  to  take  from  the 
consumer  more  than  the  government  receives  in  the 
form  of  a  tax.  The  prices  of  the  goods  supplied  by 
domestic  producers  arc  usually  increased  somewhat  by 
the  imposition  of  such  duties,  and  the  consumer  must 
pay  these  higher  prices  as  well  as  the  duties  collected 
at  the  custom-house. 

Customs  revenues  are  often  called  inelastic  because 
their  amount  cannot  be  readily  changed  to  suit  the 
needs  of  the  government.  A  tariff  can-  These  taxes 
not  be  revised  every  year  without  injury  to  are  uielastic- 
business ;  and,  when  the  rates  have  once  been  deter- 
mined, the  receipts  will  depend  upon  the  volume  of 
goods  imported  into  the  country.  In  1893  the  customs 
revenue  of  the  United  States  amounted  to  $203,355,000  ; 
but  in  the  following  year  it  fell  to  $131,818,000,  largely 
as  a  result  of  the  prevailing  industrial  depression.  In 
time  of  war  these  receipts  are  likely  to  decrease  at  the 
very  time  when  the  government  is  most  in  need  of 
revenue,  as  we  learned  to  our  cost  in  1812  and  1861. 

It  will  be  evident  that,  considered  by  themselves, 
customs  duties  are  open  to  grave  objections  as  a  sole 
source  of  revenue,  but  some  of  these  diffi- 
culties disappear  when  such  taxes  form  onc  uslons' 
merely  a  part  of  a  general  revenue  system.  It  is  cer- 
tain that  the  tendency  of  this  form  of  taxation  is  to 
throw  a  disproportionate  burden  upon  those  people  who 
are  least  able  to  contribute  to  the  support  of  the  govern- 


518  PRINCIPLES  OF  ECONOMICS. 

ment.  But  this  difficulty  may  be  partly  remedied  by 
imposing  other  taxes  that  will  oblige  persons  of  large 
resources  to  pay  in  proportion  to  their  means.  Then 
the  difficulties  that  arise  from  the  inelasticity  of  cus- 
toms revenues  may  be  obviated  by  levying  other  taxes 
whose  yield  can  be  easily  increased  whenever  there  is 
need  of  a  larger  income.  In  conclusion  it  may  be  said 
that  the  financial  needs  of  all  governments  are  so  great 
that  it  will  be  impossible,  for  a  long  time  to  come,  to 
renounce  entirely  the  large  revenues  now  derived  from 
customs  taxes. 

§  350.    Excise  duties  are  a  form  of  internal  taxation, 

and  are  levied  upon   commodities   produced    within    a 

country.     These  were  first  employed  by  the 

Excise  taxes.  _ 

United  States  in  1791,  when  duties  were 
imposed  upon  distilled  spirits  in  order  to  aid  the  govern- 
ment in  its  efforts  to  provide  for  the  Revolutionary  debt. 
They  were  extremely  unpopular,  since  there  existed 
then  and  long  afterward  a  widespread  dislike  of  in- 
ternal taxation  by  the  federal  government.  Accord- 
ingly, all  internal  taxes  were  repealed  in  1802 ;  but  the 
War  of  1812  compelled  Congress  to  levy  excise  duties 
on  spirits  and  sugar.  These  were  expressly  declared 
to  be  "temporary  war  taxes";  and  they  were  repealed, 
with  all  other  internal  revenues,  in  1817.  From  this 
date  the  government  depended  exclusively  upon  exter- 
nal taxation  until  the  outbreak  of  the  Civil  War.  Then 
it  became  necessary  to  resort  to  excise  taxation  upon 
an  unprecedented  scale.  Congress  finally  levied  taxes 
upon  the  manufacture  of  almost  every  conceivable  arti- 


TAXATION  IN  THE   UNITED  STATES.  519 

cle,  and  the  receipts  from  such  sources  rose  to  about 
$190,000,000  in  1866.  After  the  war,  taxation  was 
reduced,  and  most  of  these  excise  duties  were  repealed. 
But  the  necessary  expenses  of  the  government  had  been 
increased  so  greatly  that  internal  taxation  had  to  be 
continued  in  order  to  provide  for  pensions,  the  public 
debt,  and  other  expenditures  resulting  from  the  war. 
In  this  manner  excise  duties  on  spirits,  beer,  and 
tobacco  became  a  permanent  feature  of  our  revenue 
system.  In  1897  such  duties  yielded1  $146,688,574; 
and  the  war  revenue  act  of  the  following  year  added 
new  duties,  such  as  that  upon  patent  medicines,  which 
will  add  to  the  revenue  from  this  source. 

In  the  collection  of  our  excise  taxes  a  very  convenient 
and  effective  method  is  now  employed.  Producers  are 
required  to  affix  stamps  to  all  packages  con-  Methodof 
taining  the  articles  taxed,  and  this  must  be  collection. 
done  in  such  a  way  that  the  stamps  will  be  broken  when 
the  packages  are  opened  for  consumption.  Some  eva- 
sion exists,  especially  in  the  case  of  whiskey,  which  can 
be  distilled  with  simple  and  inexpensive  appliances.  In 
some  large  cities  and  in  the  mountainous  districts  of  the 
South  a  force  of  revenue  officers  is  constantly  employed 
in  suppressing  illicit  distillation.  When  the  excise  sys- 
tem was  developed  during  the  Civil  War,  the  rates  of 
duty  were  so  high  as  to  make  the  temptation  to  evasion 
exceedingly  strong;  and  it  was  found  that  "there  exists 
an  intimate  relation  between  the  rate  of  the  tax  and  the 

1  This  included  the  small  receipts  from  oleomargarine,  playing  cards, 
and  some  other  sources. 


520  PRINCIPLES  OF  ECONOMICS. 

extent  of  fraud  and  evasion."  Thus  in  1868  the  tax  on 
whiskey  was  $2.00  per  gallon,  which  was  more  than  ten 
times  the  original  cost  of  production.  This  high  rate 
of  duty  stimulated  wholesale  frauds,  and  the  receipts 
were  only  $13,419,000.  But  then  the  rate  was  lowered 
to  $0.50  per  gallon,  and  the  receipts  for  1869  rose  to 
more  than  three  times  the  figures  for  the  previous 
year. 

Although  the  excise  taxes  are  collected  from  pro- 
ducers, they  are,  like  customs  duties,  usually  borne  by 
character  of  consumers,  who  have  to  pay  higher  prices 
these  taxes.  for  ^ne  commodities.  They  resemble  cus- 
toms revenues  also  in  point  of  inelasticity,  since  they 
cannot  be  readily  adjusted  to  the  needs  of  the  govern- 
ment. Thus  the  "  hard  times "  prevailing  in  1893  and 
1894  reduced  the  receipts  from  internal  revenue  from 
$161,027,000  to  $143,421,000,  because  the  consumption 
of  tobacco  and  liquors  had  fallen  off.  Finally,  excise 
taxes  resemble  customs  in  that,  in  order  to  be  produc- 
tive, they  must  be  levied  upon  articles  that  are  widely 
used.  Their  burden  is  consequently  distributed  un- 
equally, and  they  become  regressive  in  their  operation. 

It  is  sometimes  said  that  both  excise  and  customs 
duties  are  voluntary  taxes,  since  citizens  can  avoid 
They  are  not  ^he  necessity  of  paying  them  by  refraining 
voiuntaiy.  from  the  consumption  of  the  articles  taxed. 
This  is  manifestly  false  when  necessities  of  life  are 
selected.  With  articles  like  beer,  whiskey,  or  tobacco, 
it  may  seem  to  be  more  nearly  true.  But  if  men  want 
these  commodities,  they  can  avoid  the  tax  only  by  giv- 


TAXATION  IN  THE   UNITED  STATES.  521 

ing  up  desired  and  customary  enjoyments.  This  is  all 
that  the  payment  of  any  tax  necessitates.  This  ques- 
tion was  much  discussed  in  this  country  when  England 
attempted  to  tax  the  American  colonies.  The  advo- 
cates of  such  taxation  argued  that  the  tax  on  tea  was 
not  imposed  without  the  consent  of  the  colonies,  because 
it  was  a  voluntary  affair  and  could  be  avoided  by  any 
one  who  was  unwilling  to  pay  it.  But  the  opponents 
correctly  insisted  that  the  alleged  voluntary  nature  of 
the  tea  duties  was  wholly  illusory.  One  writer  disposed 
of  the  question  as  follows :  "  The  same  logic  would 
demonstrate  that  a  duty  on  beer,  candles,  or  soap,  would 
be  no  tax ;  as  we  are  not  absolutely  obliged  to  drink 
beer  —  we  may  drink  water;  we  may  go  to  bed  before 
it  is  dark ;  and  we  are  not  forced  to  wash  our  shirts." 

Excise  duties  have  been  increased  by  the  legislation 
of  the  last  few  years,  and  are  sure  to  remain  an  impor- 
tant source  of  federal  revenue  for  a  long  ^wai  consid- 
time  to  come.  This  permanence  will  be  due  erations- 
chiefly  to  their  productiveness,  to  the  need  of  such  rev- 
enues, and  to  the  comparative  ease  with  which  they  are 
collected  ;  but  they  will  be  favored  by  many  people  who 
wish  to  tax  liquor  and  tobacco  heavily  in  order  to  dis- 
courage their  consumption.  The  revenues  secured  from 
excises  are  superior  to  those  collected  in  the  form  of 
customs  duties  in  the  point  of  reliability  in  time  of  such 
a  national  emergency  as  a  war  with  a  powerful  foreign 
nation.  Finally,  whatever  injustice  may  result  from  the 
inequality  of  our  excise  duties  may  be  partially  cor- 
rected by  developing  other  sources  of  revenue  that  shall 


522  PRINCIPLES   OF  ECONOMICS. 

be  drawn  from  those  classes  who  pay  less  than  their 
just  share  of  the  taxes  levied  upon  consumption. 

§  351.    Many  kinds  of  transactions  have  been  taxed 
by  governments,  but  revenues  derived  from  such  sources 
Taxes  on         have  usually  been  of  secondary  importance, 
transactions.    The  famous  Stamp  Act  of  1765  was  an  at- 
tempt to  tax  transfers  of  real  estate,  suits  at  law,  inheri- 
tances, various  commercial   transactions,  and  marriage 
licenses,   by  requiring   that  stamps   or  stamped   paper 
should   be   used  for    all  such    purposes.     In   1794  the 
United  States  levied  taxes  upon  sales  at  auction,  and 
three  years  later  stamp  duties  were  imposed  upon  many 
kinds   of    legal    and    commercial    instruments.      These 
taxes,  as  well  as  the  other  parts  of  the  internal  revenue 
svstem,  were  repealed  in  1802  ;  but  similar  ones  were 
reintroduced  in    1813,    only  to   be  abolished   again   in 
1817.     During  the  Civil  War  a  most  extensive  system 
of  stamp  duties  was  imposed  upon  almost  all  kinds  of 
business  and  legal  transactions  where  legal  instruments 
were  used,  and  snM&it  auction  were  again  taxed.     No 
inconsiderable   reWnue  was   secured  from  this  source, 
JSrt'  "the  taxes  were  repealed    at  the  close  of   the  war 
period.     Finally  the  war   revenue  act  of  1898  has  re- 
cently imposed  stamp  taxes  on  bills  of  exchange,  trans- 
fers of  stocks  and  bonds,  bills  of  lading,  bank  checks, 
telegraph  messages,  and  some  other  transactions. 

These  taxes  may  be  a  convenient  and  legitimate 
source  of  revenue  if  the  rates  are  moderate,  and  do  not 
obstruct  business  or  legal  transactions.  This  last- 
mentioned  danger  is  a   real  one.      Taxes  on  receipts, 


TAXATION  IN   THE    UNITED  STATES.  523 

for  instance,  lead  to  the  neglect  of  a  necessary  business 
form  where  only  small  amounts  are  concerned.  The 
stamp  tax  recently  imposed  on  bank  checks  operation  of 
is  objectionable  because  it  tends  to  discourage  tnese  taxes- 
the  use  of  checks  in  small,  every-day  transactions,  and 
will  retard  the  development  of  deposit  banking  in  coun- 
try districts  where  it  is  especially  desirable.  In  a 
majority  of  cases  transaction  taxes  are  borne  by  the  con- 
sumer or  purchaser,  since  they  increase  the  expense  of 
supplying  him  with  the  commodity  or  service  rendered. 
This  is  the  case,  for  instance,  with  the  tax  of  one  cent 
on  express  receipts  and  telegraph  messages,  imposed  by 
the  law  of  1898.  But  the  result  is  sometimes  different. 
The  tax  of  one  cent  on  parlor-car  tickets  has  been 
borne  by  the  transportation  companies,  perhaps  because 
it  forms  but  a  very  small  percentage  of  the  prices 
charged  to  patrons,  and  the  companies  can  afford  to 
neglect  it. 

§  352.  Many  of  our  American  commonwealths  levy 
poll  or  capitation  taxes.  These  are  imposed  at  a  uni- 
form rate,  as  two  dollars  per  poll,  upon  all  PoUtaxes 
males  between  the  ages  of  20  or  21  and 
45  or  60.  They  are  poorly  collected,  and  are  usually 
evaded  by  all  persons  who  do  not  have  to  pay  taxes  upon 
property.  The  total  receipts,  therefore,  are  small.  In 
a  few  states  payment  of  a  poll  tax  is  made  a  condition 
precedent  to  voting,  with  the  result  that  each  political 
party  pays  the  taxes  of  many  of  its  voters.  Corruption 
necessarily  follows  from  such  conditions.  The  poll  tax 
has   been   abandoned   in  most  civilized    countries,  and 


524  PRINCIPLES   OF  ECONOMICS. 

must  be  viewed  as  an  antiquated  financial  expedient. 
It  is,  moreover,  unjust  in  its  operation,  since  it  exacts 
equal  contributions  from  all,  regardless  of  tbe  different 
abilities  of  taxpayers. 

§  353.  American  states,  counties,  and  towns  have 
long  derived  most  of  their  revenue  from  the  general 
The  general  property  tax,  which  is  supposed  to  be  levied 
property  tax.  Up0n  an  the  property,  both  real  and  per- 
sonal, in  the  possession  of  taxpayers.  In  the  census 
year  1890,  the  total  amount  of  our  state  and  local 
revenues  was  placed  at  $584,835,000 ;  and  of  this  sum, 
taxes  on  property  yielded  #443,096,000,  or  about  seventy- 
five  per  cent.  It  appeared,  furthermore,  that  all  the 
taxes  other  than  that  on  property  which  were  raised  in 
this  country,  by  federal  or  local  authorities,  brought  in 
about  $453,000,000  ;  so  that  the  property  tax  was  nearly 
as  important  as  all  other  forms  of  taxation  combined. 

While   there   are    some   differences    in   the   methods 

pursued,   the   laws   of   the  various   states  provide  that 

assessors  shall  be  empowered  to  make  an 

Its  assessment  * 

and  apportion-  exhaustive  enumeration  of  all  kinds  of  tax- 
able property.  In  this  work  of  assessment, 
taxpayers  are  often  called  upon  to  make  detailed  state- 
ments of  their  possessions,  and  this  usually  must  be 
done  under  oath ;  but  the  assessors  have  the  power  to 
correct  these  declarations,  whenever  there  is  reason  to 
suspect  that  a  full  disclosure  has  not  been  made. 
Finally,  taxpayers  may  appeal  to  higher  officials  or  to 
the  courts  for  rectification  of  erroneous  assessments. 
The  property  is  supposed  to  be  rated  at  its  true  value, 


TAXATION  IN  THE    UNITED  STATES.  525 

and  the  tux  rate  is  a  certain  per  cent  of  the  assessed 
valuation.  Local  taxes  are  levied  upon  the  assessment 
rolls  of  each  town  or  county  ;  but  the  tax  for  state  pur- 
poses, after  the  amount  to  be  raised  has  been  deter- 
mined, is  apportioned  among  the  various  local  units 
upon  the  basis  of  the  respective  valuations  of  their 
taxable  property.  In  this  way  the  amount  finally  col- 
lected from  each  taxpayer  is  the  sum  of  the  rates  levied 
for  state  purposes  and  for  local. 

In  its  actual  operation  the  general  property  tax  causes 
great    inequality  in  the    distribution  of  the  tax  levied 
for   state   purposes.     Each   board  of    local  unjust  appor- 
assessors  has  a  strong  inducement  to  under-  ^onment  °* 

°  the  property 

value  the  taxable  property  found  in  its  own  tax. 
district,  because,  by  such  a  course,  the  amount  of  the 
state  tax  apportioned  to  the  locality  will  be  reduced. 
The  result  is  that  property  is  almost  never  rated  at  its 
full  value ;  while  the  assessed  valuation  may  be  only  ten 
or  twenty  per  cent  of  the  true  valuation  in  some  sections, 
and  as  high  as  eighty  or  ninety  per  cent  in  others.  In 
one  state  the  valuations  of  real  estate  in  different  coun- 
ties have  ranged  from  five  to  one  hundred  per  cent  of 
the  actual  selling  price  of  the  property.  It  follows  neces- 
sarily that  the  burden  of  state  taxation  is  distributed 
most  unjustly  among  the  various  local  units.  To  remedy 
this  difficulty  state  boards  of  equalization  have  been 
formed,  and  authorized  to  correct  these  inequalities  of 
apportionment.  But  this  could  be  done  only  by  an 
actual  revaluation  of  all  the  property  of  the  state ;  and 
the  boards  of  equalization,  at  the  best,  can  merely  pro- 


526  PRINCIPLES   OF  ECONOMICS. 

ceed   by  rough   guesswork.     In   many  cases   unseemly 

contests  ensue  between  city  and  country  interests,  each 

seeking  to  control  the  boards  and  to  increase  the  other's 

share  of  state  burdens. 

A  second  cause  of  the  grossest  injustice  is  the  failure 

of  this  tax  to  reach  personal  property.     A  large  part 

„  „  „  of  the  wealth  of  a  modern  community  con- 

its  failure  to  J 

reach  personal  sists  of  corporation  stocks  and  bonds,  mort- 
gages, notes,  book  accounts,  and  other  forms 
of  intangible  personalty  that  easily  escape  the  sharpest 
investigation  of  the  assessors.  Moreover,  these  officials 
are  usually  elected  by  the  votes  of  the  men  whom  they 
have  to  assess,  and  they  are  not  inclined  to  adopt  very 
vigorous  means  of  discovering  the  less  tangible  property 
of  the  voters.  Most  of  the  personal  property  that  is 
actually  reached  consists  of  stock  in  trade,  machinery, 
and  live  stock  or  other  farm  capital.  In  1896  nearly 
two-thirds  of  the  personalty  taxed  in  Massachusetts 
consisted  of  tangible  goods  of  this  character.  In  1850 
the  total  assessed  valuation  of  personal  property  in  all 
the  states  was  82,125,000,000,  while  real  estate  was 
valued  at  $3,899,000,000.  In  1890  the  personalty  was 
assessed  at  only  $6,516,000,000  while  realty  was  assessed 
at  $18,956,000,000.  It  will  be  noticed  that  in  forty 
years  the  assessed  valuation  of  personal  property  had 
increased  by  only  $4,391,000,000;  while  that  of  real 
property  increased  by  $15,057,000,000.  Now  it  is  a  well 
known  fact  that  during  this  period  there  has  been  a  very 
great  increase  of  personal  property,  especially  in  its  less 
tangible  forms.     Yet  its  assessed  valuation  now  forms  a 


TAXATION  IN   THE    UNITED  STATES.  527 

smaller  proportion  of  the  total  property  taxed  than  was 
the  case  in  1850.  In  the  State  of  New  York  the  propor- 
tion of  personal  property  has  constantly  decreased,  until 
nine-tenths  of  the  burden  of  taxation  falls  upon  real 
estate.  In  the  City  of  Brooklyn,  in  1895,  personal 
property  bore  less  than  two  per  cent  of  the  total  tax.  In 
New  York  the  richest  men  in  the  country  are  assessed 
for  only  a  few  hundred  thousand  dollars  of  personal 
property,  when  their  known  investments  in  corporate 
securities  yield  annual  incomes  that  amount  to  millions. 
It  may  be  stated  as  a  general  principle,  therefore,  that 
the  taxation  of  personal  property  "  is  in  inverse  ratio  to 
its  quantity  "  ;  and  that  "  the  more  it  increases,  the  less 
it  pays."  An  inevitable  result  of  this  is  that  state  taxa- 
tion falls  with  undue  weight  upon  the  country  districts, 
where  there  is  little  intangible  wealth,  and  personal 
property  exists  in  the  form  of  household  goods,  live 
stock,  and  farm  implements,  all  of  which  cannot  hope 
to  escape  the  assessor. 

One  other  kind  of  abuses  arising  from  the  present 
property  taxes  must  not  be  overlooked.  While  all 
real  estate  can  easily  be  found  by  the  asses- 

J  J  Unjust  valua- 

sor,  the  valuations  of  different  properties  tionsofreai 
are  often  most  unequal.  As  has  been  seen, 
undervaluation  is  the  general  rule ;  and  it  is  probable 
that,  throughout  the  country,  the  assessment  of  real 
property  does  not  exceed  one-half  of  its  actual  value. 
The  systematic  undervaluations  that  prevail  open  the 
door  to  gross  abuses  in  some  of  our  large  cities,  where 
the   most   valuable   lots   and    buildings   arc  sometimes 


528  PRINCIPLES   OF  ECONOMICS. 

assessed  much  more  lightly  than  smaller  properties. 
Thus  in  Chicago,  a  few  years  ago,  it  was  found  that 
seventy  of  the  choicest  pieces  of  real  estate  were  assessed 
at  less  than  nine  per  cent  of  their  true  value ;  while  eighty 
small  estates,  worth  $4,000  and  less,  were  assessed  at 
almost  sixteen  per  cent  of  the  actual  selling  price. 

But  we  cannot  stop  even  here  in  our  statement  of  the 
evils  that  attend  the  present  administration  of  the  prop- 
erty tax.     Existing  laws  offer  to  taxpayers 

Demoralization  . 

caused  by  the  terrible  inducements  to  commit  frauds. 
When  each  citizen  is  compelled  to  declare 
under  oath  the  full  value  of  his  property,  perjury  is  the 
usual  result.  An  honest  man,  who  desires  to  pay  all 
that  is  justly  due  from  him,  knows  that,  if  he  tells  the 
whole  truth,  he  will  have  to  bear  two  or  three  times  his 
fair  burden.  Thus  our  present  laws  punish  honesty 
with  a  double  load  of  taxes,  and  allow  the  dishonest  and 
unscrupulous  tax-dodger  to  escape. 

It  is  extremely  difficult  to  present  in  a  few  paragraphs 
an  adequate  discussion  of  the  incidence  of  the  general 

incidence  of    property  tax.    We  must  realize  at  the  outset 

ta^-T^n7    tliat  We   arG   110t  dealing    with    one   tax>    uut 

land.  rather  with  a  group  of  diverse  taxes,  which 

may  be  classified  as  follows  :  (1)  a  tax  on  land  ;  (2)  a 
tax  on  consumable  goods  in  the  hands  of  their  owners  ; 
and  (3)  taxes  on  investments  of  private  capital.1  The 
incidence  of  the  tax  on  land  will  be  first  considered. 
This  tax  is  levied  in  this  country  upon  the  selling  price 
of  the  land,  and  it  is  virtually  graded  according  to  the 

1  "  Private  capital"  is  used  strictly  in  the  sense  explained  in  §  260. 


TAXATION  IN    THE    UNITED  STATES.  529 

amount  of  rent  that  each  tract  yields,  since  the  selling 
price  is  the  annual  rental  capitalized  at  the  current  rates 
of  interest.  Now  a  tax  levied  upon  economic  rent  must 
be  borne  by  the  landowner,  and  cannot  be  shifted.  The 
rent  of  land  is  determined  by  the  superior  advantages 
that  one  tract  furnishes  for  the  investment  of  capital 
over  the  opportunities  offered  by  the  poorest  tracts  util- 
ized. The  landlord  will,  if  competition  is  active,  exact 
from  the  tenant  all  that  the  superior  situation  or  quality 
of  his  land  enables  him  to  demand.  The  imposition  of 
the  tax  will  not  alter  the  situation  so  as  to  change  the 
economic  rent  and  enable  the  landlord  to  shift  the  bur- 
den onto  the  tenant  by  charging  a  higher  rental.  But 
it  is  important  to  notice  that  the  land  tax  in  this  country 
is  a  burden  mainly  upon  the  original  owner  of  the  prop- 
erty at  the  time  that  a  new  tax  is  first  laid,  or  an  old 
one  increased.  This  is  because  a  prospective  purchaser 
will  make  allowance  for  the  tax  when  he  determines 
how  much  he  can  afford  to  pay  for  the  land.  Invest- 
ments in  corporation  securities  and  many  other  things 
largely  escape  taxation  under  our  present  methods.  A 
man  will  not  purchase  land  unless  he  can  obtain  from  it 
the  same  return  that  can  be  secured  from  these  untaxed 
investments  ;  and  he  will,  accordingly,  offer  a  smaller 
price  than  he  would  be  willing  to  pay  if  the  land 
were  untaxed.1  Thus,  if  a  tract  of  land  yielded  an 
annual  rent  of  $5,000,  and  the  rate  of  interest  on  equally 
secure  investments  was  five  per  cent,  its  selling  price 

1  If  all  forms  of  investment  were  taxed  with  the  same  certainty  as 
land,  the  case  would  be  otherwise. 

34 


530  PRINCIPLES   OF  ECONOMICS. 

would  be  1100,000.  Now  if  a  tax  of  $500  should  be  im- 
posed, prospective  purchasers  would  deduct  $10,000,  the 
capitalized  value  of  the  tax,  from  the  price  that  they 
would  be  willing  to  pay  ;  and  the  burden  would  fall  en- 
tirely upon  the  original  owner. 

The  property  tax,  in  the  second  case,  reaches  many 
kinds  of  consumers'  goods  in  the  hands  of  their  owners, 

2.  on  consum-  Sll(m  as  dwelling-houses  inhabited  by  own- 
ers' goods.       ers>  household  furniture,  and  the  like.     All 

these  goods  are  not  kept  for  sale  or  for  hire,  but  solely 
for  the  owners'  use.  Consequently  the  tax  cannot  be 
shifted  onto  tenants  or  purchasers,  and  must  be  borne 
by  the  owners  of  the  property. 

In  the  third  case,  the  general  property  tax   is  sup- 
posed to  fall  upon  all  kinds  of  private  capital  invested 
for  the  sake  of  income.     If  the  purpose  of 

3.  On  invest- 
ments of         the    laws   were    actually   accomplished,   so 

capital.  ^at  ajj  p0SS}Die  fields  of   investment  were 

taxed  equally,  the  tax  could  not  be  shifted,  and  would 
be  borne  by  the  owners  of  capital.  This  is  for  the 
reason  that  shifting  can  take  place  only  when  capital 
can  be  withdrawn  from  an  industry  that  is  taxed,  and 
invested  in  others  that  are  free  from  taxation.  When 
this  can  be  done,  the  taxation  of  capital  invested  in  a 
few  industries  results  in  a  readjustment  of  prices, 
which  will  finally  enable  the  taxed  investments  to  yield 
the  same  return  as  those  which  are  untaxed.  Now 
the  wholesale  evasion  of  our  property  tax  leaves  a  large 
part  of  the  field  for  investments  virtually  untaxed,  so 
that  it  is  frequently  possible  for  shifting  to  take  place. 


TAXATION  IN  THE    UNITED  STATES.  531 

Rome  of  the  more  important  kinds  of  investments  need 
to  be  examined  separately.  (.1)  Taxes  upon  dwelling- 
houses  that  arc  built  for  hire  arc  in  large  measure 
shifted  onto  the  occupier,  since  capitalists  will  not 
make  such  investments  unless  the  same  rate  of  return 
can  be  obtained  as  can  be  secured  in  untaxed  enter- 
prises. In  case,  however,  a  lessened  demand  for  lodg- 
ings makes  the  supply  of  houses  greater  than  the 
number  actually  required,  then  rentals  will  have  to  be 
lowered  and  the  tax  will  fall  upon  the  owners.  This 
is  because  the  capital  invested  in  the  form  of  houses 
cannot  be  withdrawn  and  applied  elsewhere  in  new 
enterprises.  (B)  Taxes  upon  buildings,  machinery,  and 
stocks  of  goods  used  in  commerce  or  manufactures 
would  also  bo  shifted  if  competition  were  perfect.  But 
these  investments,  when  once  made,  are  highly  special- 
ized, and  trade  conditions  often  make  it  difficult  to 
shift  such  taxes  upon  consumers.  Thus,  for  instance, 
competition  by  foreign  producers,  or  by  producers  more 
advantageously  situated  in  some  other  part  of  the 
country,  may  render  it  impossible  for  merchants  or 
manufacturers  to  raise  prices  and  shift  the  tax.  ( (?) 
The  same  considerations  apply  to  taxes  on  buildings, 
live  stock,  and  implements  used  in  agriculture,  and 
with  added  force.  American  farmers  sell  a  large  part 
of  their  products  in  foreign  markets  where  prices  arc 
determined  by  international  competition.  Moreover, 
they  arc  slow  to  adjust  themselves  to  new  conditions, 
so  that  competition  acts  very  imperfectly  upon  agri- 
cultural   industry.     It    seems    reasonably    certain   that 


532  PRINCIPLES   OF  ECONOMICS. 

taxes  upon  farming  capital  arc  borne  by  the  farmers 
themselves.  (D)  Taxes  upon  mortgages  operate  very 
differently.  The  capital  invested  in  this  manner  is 
more  free  to  seek  the  most  profitable  fields  of  invest- 
ment. It  can  in  a  few  years  leave  any  state  or  com- 
munity where  unusual  burdens  are  placed  upon  it,  and 
has  repeatedly  done  so.  The  result  is  that,  where  our 
tax  laws  actually  reach  mortgage  investments,  the  tax 
is  surely  shifted  upon  the  borrower,  in  the  form  of  a 
higher  rate  of  interest.  In  many  states  mortgages 
practically  evade  all  taxation ;  but  when  they  are 
reached,  as  in  California,  the  rate  of  interest  is  higher 
than  that  asked  for  other  equally  safe  investments,  and 
higher  by  something  more  than  the  amount  of  the  tax. 
(E)  Finally,  we  may  mention  taxes  upon  corporation 
stocks  and  bonds.  For  the  most  part  these  escape 
taxation,  but,  when  they  are  reached,  the  probability 
is  that  shifting  often  takes  place.  (F)  The  results 
of  the  foregoing  discussion  need  to  be  qualified  in  the 
case  of  taxes  that  reach  enterprises  of  a  monopolistic 
character.  These  cannot  be  shifted  if  they  arc  fixed 
in  amount,  or  if  they  are  proportioned  to  monopoly 
profits.  This  has  been  explained  in  a  previous  chapter 
(§  201). 

Our   general   property   tax   has   been    shown    to    be 

largely    a   tax    upon  real   estate,   since   most   personal 

„     ,    .  property,  except  that   of   a   tangible   form, 

Conclusions       r     r       j  7  i  o 

concerning  the  escapes   the    assessors.      In   its   apportion- 

propertytax.  .  .  .  ...  . 

ment   there    arc    the    grossest    inequalities 
between   different   towns    and   counties,  while  between 


TAXATION  IN   THE    UNITED  STATES.  533 

individual  citizens  its  burdens  are  often  distributed 
without  the  remotest  approach  to  justice.  More  than 
this,  it  lias  become  a  fruitful  source  of  demoralization, 
and  is  systematically  educating  our  people  in  habits 
of  fraud  and  perjury.  In  theory  the  tax  is  unjust  as 
a  main  source  of  public  revenue,  since  property  is  not 
the  best  measure  of  ability  ;  and  in  practice  "  the  gen- 
eral property  tax  as  actually  administered  is  beyond 
all  doubt  one  of  the  worst  taxes  known  in  the  civilized 
world."  :  It  has  been  abandoned  in  most  other  coun- 
tries as  a  principal  form  of  taxation,  and  is  condemned 
by  practically  all  students  of  finance. 

§  354.  The  stocks  and  bonds  of  business  corpora- 
tions have  been  taxable  under  the  theory  of  the  gen- 
eral property  tax,  and  our  states  have  corporation 
undertaken  to  find  and  assess  corporate  taxes* 
securities  in  the  possession  of  their  citizens.  But 
these  efforts  have  met  with  little  success,  and  the 
general  property  tax  has  utterly  failed  to  reach  such 
intangible  forms  of  personal  property.  Accordingly, 
various  states  have  adopted  a  more  successful  expedi- 
ent, —  the  taxation  of  the  corporations  themselves ; 
and  these  special  taxes  upon  corporations  have  assumed 
increasing  importance  as  the  number  of  corporate 
enterprises  has  increased.  It  is  almost  needless  to 
add  that  the  states  have  found  it  much  easier  to  deal 
directly  with  a  corporation  than  to  discover  and  assess 
its  stocks  and  bonds  in  the  hands  of  individual  holders. 

1  Seligman,  Essays  in  Taxation,  Gl.  All  students  of  the  subject  have 
failed  to  fiud  words  strong  enough  to  do  justice  to  the  iniquities  of  the 
tax. 


534  PRINCIPLES   OF  ECONOMICS. 

The    development    of   special    corporation    taxes   in 

many  states  has  taken  the  form  of  the  taxation  of  banks, 

insurance  companies,    railroads,   telegraph 

ciai  corpora-     and  express  companies,  and  some  other  cor- 

tions.  .  _ 

porate  enterprises.  Banks  are  commonly 
taxed  upon  their  capital  stock,  the  corporation  usually 
being  required  to  pay  the  tax  and  to  withhold  the 
amounts  from  the  dividends  received  by  the  share- 
holders. This  method  of  collection  is  called  "  stoppage 
at  the  source  ; "  and  by  means  of  it  private  incomes 
may  be  found  and  taxed  with  entire  certainty  at  the 
source  whence  they  arise.  In  addition,  banks  pay  the 
regular  property  tax  on  their  real  estate.  Insurance 
companies  are  usually  taxed  upon  their  premiums,  or 
gross  receipts,  but  sometimes  net  receipts  are  made 
the  basis  of  assessment.  Railroads  are  taxed  in  a 
great  variety  of  ways.  In  many  states  the  gross  earn- 
ings are  taxed  ;  in  others  the  tax  is  levied  upon  the 
value  of  the  outstanding  stocks  and  bonds.  When  a 
railroad  operates  in  different  states,  the  tax  in  any 
single  state  is  usually  levied  upon  an  amount  of  gross 
earnings  or  outstanding  securities  that  corresponds  to 
the  proportion  which  the  mileage  of  the  railroad  in 
that  state  bears  to  the  total  mileage  of  the  system. 
Sometimes  this  special  tax  takes  the  place  of  all  other 
forms  of  taxation  ;  in  other  cases,  the  roads  are  sub- 
ject to  local  taxation  of  their  real  estate.  Telegraph 
companies,  finally,  are  taxed  upon  their  gross  receipts 
or  their  mileage. 

In   some  states  a  general  corporation  tax  has  been 


TAXATION  IN  THE   UNITED  STATES.  535 

established,  and  made  applicable  to  all  corporations 
except  those  otherwise  provided  for.  Thus  Pennsyl- 
vania imposes  a  tax  of  five  mills  on  each  ^ 

r  The  general 

dollar  of  actual  value  of  the  capital  stock  corporation 
of  all  corporations  doing  business  within  its 
boundaries,  besides  a  tax  of  four  mills  on  each  dollar 
of  interest  paid  on  corporation  bonds  or  certificates 
of  indebtedness.  This  takes  the  place  of  all  local 
taxation.  While  New  York  is  the  only  state  that  has 
gone  as  far  as  Pennsylvania  in  developing  a  general 
corporation  tax,  a  number  of  others  have  taxes  that 
apply  to  domestic  corporations. 

The  diversity  of  practice  in  different  states  makes  it 
difficult  to  describe  corporation  taxes  in  a  few  para- 
graphs, and  the  student  should  supplement  The  future  of 
this  statement  by  a  careful  study  of  the  sys-  ttese  taxes- 
tem  employed  in  his  own  locality.  It  seems  certain  that 
the  constant  increase  in  the  number  and  importance  of 
corporate  undertakings  will  result  in  a  corresponding 
development  of  this  form  of  taxation.  In  some  cases 
more  revenue  is  now  collected  for  state  purposes  by 
means  of  corporation  taxes  than  by  the  general  property 
tax.1  It  is  to  be  hoped  that  the  old  and  futile  attempts 
to  make  the  tax  on  property  reach  corporate  securities 

1  In  1896  Massachusetts  collected  for  state  purposes  $3,317,291  by  cor- 
poration taxes,  and  $1,745,340  by  the  tax  on  property.  The  same  year 
Pennsylvania  collected  $0,945,899  from  corporations,  and  $2,710,207  from 
a  tax  on  personal  property,  real  estate  not  being  taxed  for  state  purposes. 
Vermont  in  1894  collected  $343,090  from  the  tax  on  corporations,  and 
$2G4,097  from  that  on  property.  In  1890  the  census  showed  that  all 
of  the  States  received  $21,837,866  from  taxes  upon  corporations.  This 
amount  is  much  larger  today. 


536  PRINCIPLES   OF  ECONOMICS. 

in  the  hands  of  the  holders  will  be  entirely  superseded 
by  taxes  assessed  directly  upon  the  corporations.  This 
will  make  it  possible  to  collect  taxes  from  the  companies 
themselves,  and  will  make  evasion  difficult. 

In  the  taxation  of  corporations  the  chief  difficulties 
encountered  are  of  a  legal  character.     Citizens  of  one 
other  consid-    state   may   charter  a   company   in   another 
erations.        state  for  the  purpose  of   carrying  on  busi- 
ness  in  a   dozen   others.     Under  such  conditions,  the 
work  of  framing  a  state  corporation  tax  is  very  difficult. 
A  tax  upon  the  gross  receipts  of  a  corporation  chartered 
in  another  state  is  invalid  if  that  corporation    derives 
its  income,  even  in  part,  from  interstate  business,  be- 
cause it  is  held  to  be  a  restraint  upon  interstate  com- 
merce, which  is  beyond  state  control.     Again,  a  state 
in  which  a  company  is  chartered  cannot  tax   corporate 
bonds  owned  by  non-residents,  because  such  a  tax  would 
extend  to  property  and  interests  beyond  its  jurisdiction. 
If  the  federal  government  possessed  constitutional  au- 
thority to  tax  corporations  and  distribute  the  proceeds 
equitably  among  the  states,  all  these  troubles  could  be 
easily  removed.     As  it  is,  the  situation  is  a  difficult  one  ; 
yet  much  has  already  been  accomplished.     Recent  au- 
thorities favor  a  tax  upon  that  part  of  the  net  receipts 
of  corporations  which  is  derived  from  business  transacted 
within  the  state  levying  the  assessment,  provided  that 
the  traffic  is  of  such  a  character  that  this  proportion  can 
be    ascertained,  and  provided   further  that   the  courts 
will  uphold   such  a   system.      If,   however,  the   courts 
should    decide  otherwise,  it  would    be  best  to  levy  the 


TAXATION  IN  THE   UNITED  STATES.  537 

tax  upon  that  part  of  the  market  value  of  the  capital 
stock  plus  the  bonded  debt  which  is  employed  within 
the  state. 

§  355.  License  taxes  upon  various  business  and  pro- 
fessional pursuits  have  often  been  employed  in  the  United 
States.     In  1794  and  1813  the  federal  gov- 

License  taxes. 

eminent  imposed  such  taxes  on  some  classes 
of  liquor  dealers,  but  these  imposts  were  not  permanent. 
During  the  Civil  War  a  most  extensive  system  of  license 
taxes  was  imposed  on  merchants,  bankers,  brokers,  and 
professional  men.  In  some  cases  these  were  fixed  sums, 
in  others  they  were  roughly  graduated  according  to  the 
amount  of  business  transacted.  In  general  they  were 
regressive  in  their  operation,  and  bore  heavily  upon  the 
smaller  dealers.  After  the  war  we  retained  only  the 
federal  license  taxes  upon  dealers  in  tobacco  and  liquors, 
but  the  war  revenue  act  of  1898  imposed  taxes  on  bank- 
ers, brokers,  proprietors  of  places  of  public  amusement, 
and  pawnbrokers. 

Practically  all  of  our  cities  and  many  of  the  states 
make  use  of  license  taxes  upon  certain  occupations. 
These  are  usually  fixed  sums,  but  are  some-  _..      .,    , 

J  '  State  and  local 

times  graduated  in  a  manner  that  roughly  license  tax- 
corresponds  to  the  abilities  of  the  taxpayers. 
In  the  cities  of  the  South  a  very  extensive  system  of 
taxes  on  business  and  professional  pursuits  is  often  em- 
ployed. In  one  city  licenses  were  required  a  few  years 
ago  for  fifty-six  classes  of  occupations.  Such  taxes  tend 
to  restrict  competition  from  new  enterprises,  and  they 
bear  with  very  unequal  weight  upon  the  smaller  estab- 


538  PRINCIPLES   OF  ECONOMICS. 

lishments.  In  other  parts  of  the  country  license  charges 
are  imposed  only  upon  a  few  occupations,  such  as  the 
business  of  liquor  dealers,  peddlers,  pawnbrokers,  and 
the  like.  Taxes  upon  the  sale  of  liquors  usually  yield 
far  more  revenue  than  all  the  rest  of  these  license  taxes. 
But  Pennsylvania  has  a  system  of  mercantile  licenses 
on  peddlers,  merchants,  stockbrokers,  theatres,  etc., 
from  which  the  state  government  derived  a  revenue  of 
6541,870  in  the  year  1897.  In  some  states  the  receipts 
from  liquor  licenses  are  divided  between  the  state  and 
local  governments.  Thus  Massachusetts,  in  1896,  re- 
ceived 6737,000  from  this  source ;  and  turned  over  to 
the  towns  and  cities  the  remaining  three-fourths  of  the 
tax.  New  York  now  derives  from  taxes  upon  the  sale 
of  liquors  a  very  large  revenue,  which  amounted  to 
$4,215,860  during  the  year  1898.  These  license  taxes 
are  employed  partly  for  the  purpose  of  regulating  and 
restricting  the  traffic,  especially  in  the  case  of  the  tax 
upon  the  sale  of  intoxicating  liquors.  But  the  liquor 
tax  is  an  important  source  of  revenue  to  most  cities  and 
to  some  of  the  states. 

§  356.  The  inheritance  tax,  as  it  is  popularly  called, 
is  imposed  "  on  the  devolution  of  property,  whether  real 
Theinheri-  or  personal,  whether  by  will  or  by  intes- 
tancetax.  tacy."  It  is  extensively  employed  to-day  in 
Great  Britain,  Switzerland,  and  Australia;  and  has  been 
introduced,  in  some  form,  in  fifteen  or  more  of  our 
states.  In  most  of  these  commonwealths  only  collate- 
ral inheritances  are  taxed,  but  in  some  cases  direct 
inheritances  arc  also  included.     The  tax  has  met  with 


TAXATION  IN  THE    UNITED  STATES.  539 

such  general  favor  that  its  adoption  in  other  states  seems 
merely  a  question  of  time. 

In  levying  the  inheritance  tax  a  certain  minimum 
amount  of  property  is  exempted  from  its  operation. 
Thus  in  Massachusetts  no  estate  is  taxed  Methods  of 
unless  its  value,  after  all  debts  are  paid,  assessment- 
exceeds  -$10,000.  In  that  state,  also,  bequests  for  edu- 
cational, charitable,  or  religious  purposes  are  exempted. 
In  Ohio,  Illinois,  and  Missouri  the  rate  of  the  inheritance 
tax  has  been  made  progressive.  When  this  is  done,  the 
rate  should  not  only  be  higher  on  large  estates  than 
upon  small,  but  also  higher  for  collateral  inheritances 
than  for  those  in  the  direct  line. 

In  theory  inheritance  taxes  are  just,  since  the  receipt 
of  an  inheritance  of  $10,000  or  more  is  certainly  a  good 
indication  of  ability  to  bear  public  burdens.  „ 

J  L  Operation  of 

In  practice  the  taxes  imposed  by  our  States  inheritance 
have  worked  well,  since  they  are  easily  col- 
lected and  are  subject  to  much  less  evasion  than  many 
other  forms  of  taxation.  Most  estates  have  to  pass 
through  the  probate  courts  because  it  is  difficult  other- 
wise to  determine  the  assets,  settle  the  debts,  and  effect 
a  just  distribution  among  the  heirs.  Thus  publicity  is 
ensured,  and  the  collection  of  the  tax  is  fairly  certain 
and  very  inexpensive.  While  it  might  be  possible  to 
increase  the  rates  of  inheritance  taxes  sufficiently  to 
check  the  growth  and  transmission  of  large  fortunes,  no 
such  consideration  is  involved  in  the  imposition  of  a 
moderate  tax,  which  can  be  easily  defended  as  a  most 
just  method  of  raising  public  revenue.     Even  a  moder- 


540  PRINCIPLES   OF  ECONOMICS. 

ately  progressive  rate  can  be  justified,  since  it  cor- 
responds better  to  the  abilities  of  the  taxpayers  and  can 
be  collected  with  certainty  (§  346).  Of  course,  this  tax 
falls  wholly  upon  the  recipient  of  the  inheritance,  who 
has  no  way  in  which  he  may  shift  the  burden.  Some 
states  already  find  the  tax  on  inheritances  an  impor- 
tant branch  of  revenue.  In  1898  New  York  received 
$1,997,210  from  this  source  ;  while  Pennsylvania,  in 
1897,  received  $894,741.  The  extension  of  the  tax  to 
all  inheritances  in  excess  of  $10,000,  whether  direct  or 
collateral,  and  the  imposition  of  a  reasonably  high  rate 
would  enable  most  of  the  states  to  collect  a  large  re- 
venue with  little  expense. 

The  war  revenue  act  of  1898  established  a  federal  tax 

upon  inheritances  of   personal   property  whenever  the 

„ ,    ,  estate   exceeds   $10,000.     The   law  follows 

Federal  tax- 
ation of  inheri-  correct  principles  in  making  the  rate  lighter 

tfllftCfifl 

upon  property  passing  to  direct  relatives 
than  upon  that  passing  to  distant  heirs,  and  in  gradua- 
ting the  tax  according  to  the  size  of  the  estate.  The 
highest  rate  imposed  would  be  fifteen  per  cent  upon  es- 
tates exceeding  $1,000,000  that  pass  to  the  most  distant 
collateral  relatives  or  to  "  strangers  in  blood."  It  is  to 
be  hoped,  however,  that  this  tax  will  not  be  retained  as 
a  permanent  feature  of  our  federal  revenue  system. 
Many  states  are  already  taxing  inheritances  with  the 
best  of  results,  and  others  are  sure  to  adopt  this  form  of 
taxation  in  the  absence  of  the  complications  that  may 
arise  from  a  similar  federal  tax.  All  the  revenue  that 
can  be  properly  derived  from  this  source  is  needed  by 


TAXATION  IN  THE   UNITED  STATES.  541 

the  states  in  order  to  enable  them  to  effect  the  most 
necessary  reforms  in  their  tax  systems.  The  needs  of 
the  federal  government  can  be  met  by  other  means,  and 
a  federal  inheritance  tax  will  probably  tend  to  check 
this  desirable  movement  toward  the  general  adoption  of 
this  form  of  taxation  by  the  states. 

§  357.  Income  taxes  are  levied  in  proportion  to  the 
income  of  the  taxpayer.  Great  Britain  has  employed 
a  tax  of  this  character  continuously  since  The  income 
1842,  and  now  derives  about  $75,000,000  **• 
from  this  source.  Italy,  Prussia,  Saxony,  and  other  Ger- 
man states  also  tax  incomes ;  and  within  recent  years 
similar  taxes  have  been  established  in  Holland  and  New 
Zealand.  In  this  country  the  taxation  of  incomes  was 
formerly  practised  by  some  of  the  states  ;  but  the  tax 
was  poorly  administered,  and  has  been  abandoned  in 
most  cases.  Only  Virginia  retains  a  general  income 
tax,  but  a  few  other  states  have  taxes  on  certain  kinds 
of  incomes.  The  revenues  secured  in  this  manner,  how- 
ever, are  unimportant. 

During  the  Civil  War  our  government  levied  a  gen- 
eral  income  tax,  which  yielded   $72,982,000  in  1866. 

After  that  time,  however,  the  law  was  modi- 

Federal  taxa- 

fied  by  reducing  the  rate  and  exempting  tionofin- 
incomes  of  less  than  $2000,  so  that  the  re-  comes' 
eeipts  declined  until  the  tax  was  abandoned  after  1872. 
In  1894,  in  order  to  provide  needed  revenue,  another 
income  tax  was  established ;  but  this  was  declared  un- 
constitutional before  it  had  gone  into  operation.  The 
Constitution   requires   that    representatives   and   direct 


542  PRINCIPLES   OF  ECONOMICS. 

taxes  shall  be  apportioned  among  the  several  states 
"  according  to  their  respective  numbers."  Congress 
has  attempted  to  levy  such  an  apportioned  tax  only 
three  times,  and  the  results  have  been  very  unsatis- 
factory. At  the  present  day  the  various  sections  of  the 
country  differ  so  widely  in  point  of  wealth  that  any  tax 
levied  according  to  numbers  would  be  absolutely  repug- 
nant to  all  ideas  of  justice ;  and  the  experiment  will 
probably  never  be  tried  again.  The  income  tax  of  1862 
was  not  apportioned  among  the  states,  but  was  levied  as 
an  indirect  tax  upon  incomes  wherever  they  might  be 
found. 

The  law  of  1894  followed  the  same  method ;  but 
the  Supreme  Court  decided  that  the  tax  was  a  direct 
tax  within  the  meaning  of  the  Constitution  and  could 
be  levied  only  by  the  rule  of  apportionment.  This 
decision  was  reached  by  a  divided  bench,  and  reversed 
all  precedents ;  for  it  had  been  held  previously  that 
poll  and  land  taxes  were  the  only  direct  taxes  contem- 
plated by  the  Constitution.  Its  effect  is  to  make  federal 
taxation  of  incomes  practically  impossible,  since  an 
apportioned  income  tax  would  be  a  shameful  mockery 
of  all  justice.  Although  this  decision  has  been  ac- 
cepted as  final  by  the  tax-dodgers  who  attacked  the  law 
of  1894,  it  is  not  certain  that  it  commended  itself  to 
the  best  thought  of  the  country.  Lowell's  words, 
written  concerning  the  Dred  Scott  decision,  are  de- 
cidedly pertinent  here :  "  With  history  before  us,  it  is 
no  treason  to  question  the  infallibility  of  a  court;  for 
courts  are  never  wiser  or  more  venerable  than  the  men 


TAXATION  IN  THE   UNITED  STATES.  543 

composing  them,  and  a  decision  that  reverses  precedent 
cannot  arrogate  to  itself  any  immunity  from  reversal." 

An  income  tax,  if  it  can  be  well  enforced,  is  one  of 
the  most  just  forms  of  taxation,  since  income  is  a  better 
test  of  faculty  than  any  other  single  crite-  The  theor^  of 
rion.  If  it  is  a  general  tax  upon  all  forms  the  income 
of  income,  it  cannot  be  easily  shifted,  as  has 
been  explained  in  a  previous  paragraph.  If  some  forms 
of  income  are  exempt,  or  if  the  tax  is  partially  evaded, 
it  then  operates  like  a  tax  upon  special  forms  of  invest- 
ment, and  is  likely  to  be  shifted.  But  in  any  case, 
wherever  it  reaches  the  rent  from  land  or  the  income 
from  monopoly  privileges,  it  probably  rests  upon  the 
persons  upon  whom  it  is  assessed.  In  framing  income 
taxes  it  is  usual  to  exempt  small  incomes,  of  less  than 
$500,  for  instance.  This  can  be  justified  upon  two 
grounds.  The  recipients  of  such  incomes,  in  the  first 
place,  are  certain  to  bear  a  disproportionate  share  of 
the  taxes  levied  upon  consumption ;  and  the  exemption 
of  this  minimum  amount  serves  to  equalize  the  whole 
burden  of  taxation.  In  the  second  place,  a  tax  upon 
such  small  incomes  costs  as  much  to  collect  as  it 
brings  into  the  public  treasury ;  and  is,  therefore,  not 
an  economical  measure. 

Unless  the  best  methods  are  employed,  the  income 
tax  is  difficult  to  collect.  The  tax  levied  during  the 
Civil   War  was  not  framed  as  wisely  as  it  ^ 

J  The  adminis- 

might  have  been,  and  was  subject  to  a  great  tration  of  in- 
deal  of  evasion,  especially  after  the  war  had 
come   to   an   end.      It  encountered   bitter  hostility   in 


544  PRINCIPLES   OF  ECONOMICS. 

some  quarters,  as  did  the  tax  established  in  1894 ;  hut 
this  opposition  was  largely  confined  to  a  single  locality, 
where  the  richest  men  of  the  country  are  gathered  in 
large  numbers.  In  England  and  other  countries  income 
taxes  have  been  constantly  improved,  and  operate  more 
satisfactorily  the  longer  they  remain  in  force.  The 
English  laws  divide  incomes  into  five  classes,  and  at- 
tempt to  reach  revenue  at  its  sources,  whenever  that 
can  be  done.  This  method  is  capable  of  extensive 
application.  Taxes  on  incomes  derived  from  corpora- 
tion securities  can  be  collected  from  the  corporations, 
and  the  same  thing  can  be  done  with  the  salaries  of  the 
employees  of  such  companies.  The  rent  of  real  estate 
can  be  easily  ascertained,  and  can  be  collected  from  the 
occupier,  who  can  deduct  it  from  his  rent,  if  he  be  a 
tenant.  If  the  land  is  mortgaged,  a  proportional  amount 
can  be  deducted  from  the  interest  payments.  Salaries 
of  public  officials  can,  of  course,  be  taxed  readily  at  the 
source.  This  leaves  only  three  kinds  of  incomes  un- 
provided for,  viz.,  profits  from  the  cultivation  of  land, 
the  profits  of  unincorporated  manufacturing  or  mercan- 
tile enterprises,  and  the  earnings  of  professional  men. 
In  these  cases  it  may  be  necessary  to  employ  personal 
declarations  of  the  taxpayers  ; 1  but  the  tax  officials  can 
secure  various  external  criteria  by  which  to  test  the 
accuracy    of    the    statements   returned,    so   that   gross 

1  Tn  England  tho  tax  on  agricultural  profits  is  fixed  at  a  certain  per 
cent  of  the  annual  value  of  the  property,  and  declarations  of  the  taxpayers 
are  not  required.  Professor  IT.  C.  Adams  has  recently  suggested  a  plan 
for  taxing  professional  incomes  without  resorting  to  declarations.  See 
Science  of  Finance,  505. 


TAXATION  IN  THE   UNITED  STATES.  545 

evasions  can  be  prevented.  One  final  matter  should  be 
noted.  The  methods  of  assessment  just  outlined,  which 
are  the  best  yet  developed,  presuppose  that  the  rate 
of  the  income  tax  will  be  proportional.  With  these 
methods  the  whole  amount  of  a  person's  income  is  not 
determined,  and  the  government  must  content  itself 
with  merely  ascertaining  the  particular  sources  of  rev- 
enue. It  is  manifestly  impossible  to  impose  a  progres- 
sive rate  under  these  conditions.  The  ascertainment 
of  each  taxpayer's  entire  income  and  the  imposition  of 
a  progressive  rate  would  be  more  just,  if  such  a  thing 
were  practicable.  But  a  proportional  tax  strictly  en- 
forced and  collected  is  preferable  in  all  respects  to  a 
graduated  tax  that  is  subject  to  wholesale  evasion. 

The  experience  of  many  countries  shows  that  the 
taxation  of  income  finds  increasing  favor  as  a  just  and 
lucrative  source  of  public  revenue.  It  seems  conclusions 
probable  that  public  opinion  in.  the  United  £°0c^2a- 
States  will  show  a  similar  tendency,  so  that  ti°n. 
income  taxation  may  become  a  live  issue  in  the  near 
future.  Some  writers  favor  the  imposition  of  income 
taxes  by  the  states,  especially  since  the  recent  decision 
of  the  Supreme  Court  makes  a  federal  tax  impossible 
for  the  present.  But  it  would  probably  be  impossible 
for  the  states  to  operate  successfully  a  system  of  income 
taxation.  The  principal  reason  for  this  belief  is  that 
wealthy  persons  can  so  easily  move  out  of  a  state  that 
taxes  incomes  into  another  that  imposes  no  such  burdens. 
New  Jersey,  Delaware,  and  other  states  would  certainly 
hold  out  inducements  for  people  who  wished  to  avoid 

85 


546  PRINCIPLES   OF  ECONOMICS. 

their  just  public  obligations  ;  so  that  New  York  and 
Pennsylvania,  for  instance,  could  not  establish  satisfac- 
tory income  taxes.  A  second  reason  is  found  in  the 
legal  difficulties  that  would  attend  such  taxation  if  con- 
ducted by  the  states.  These  are  of  the  same  nature  as 
those  which  attend  our  state  corporation  taxes.  A  final 
reason  is  that  a  state  could  not  apply  the  best  methods 
of  collection  in  many  cases,  because  the  stoppage  of 
incomes  at  the  source  could  not  be  applied  to  corpora- 
tions chartered  in  other  states.  Federal  taxation  of 
incomes  would  be  the  only  satisfactory  plan,  and  it  is 
sincerely  to  be  hoped  that  the  constitutional  difficulties 
that  now  prevent  such  action  may  be  ultimately  re- 
moved. The  federal  government  would  be  free  from 
the  legal  difficulties  that  would  beset  the  states  in  a 
similar  effort,  and  citizens  would  not  leave  the  country 
in  order  to  avoid  their  obligations.  Finally,  the  federal 
officials  would  administer  the  tax  far  more  strictly  than 
the  local  assessors  could  possibly  do  under  the  pressure 
that  would  be  brought  to  bear  upon  them. 

§  358.     In  concluding  this  subject  it  will  be  desirable 

to  present  a  brief  survey  of  the  entire  field  of  American 

summary       taxation,  and  to  show  in  what  directions  im- 

attontaaf"   Provement   is  desirable   and   possible.1      In 

united  states,  order  to  gain  a  rational  view  of  this  subject 

it  is  necessary  for  the  student  to  treat  all  state,  local, 

or  federal  revenues  as  parts  of  one  system,  and  to  con- 

1  The  only  comprehensive  treatment  of  this  entire  subject  is  to  be 
found  in  Adams,  The  Science  of  Finance,  400-516.  With  respect  to  the 
income  tax  the  author's  views  arc  not  in  accord  with  those  of  Professor 
Adams. 


TAXATION  IN  THE    UNITED  STATUS.  547 

aider  each  tax  in  its  relations  to  this  general  system  of 
finance.  Any  other  method  of  procedure  results  only 
in  confusion. 

Customs  taxes  are  practically  reserved  for  the  use 
of  the  federal  government  by  the  Constitution,  which 
forbids  any  state  to  "  lay  any  imposts  or  Federal  Tax. 
duties  on  imports  or  exports."  Excise  tax-  ation- 
ation  also  can  be  practised  only  by  the  federal  author- 
ities, since  no  state  could  undertake  to  tax  the  production 
of  commodities  without  driving  manufacturing  industries 
into  other  states.  Thus  two  great  branches  of  revenue 
arc  already  marked  out  for  the  exclusive  use  of  the 
national  government.  Federal  taxes  on  transactions, 
such  as  were  established  by  the  revenue  act  of  1898, 
should  be  employed  with  great  moderation,  since  they 
are  likely  to  obstruct  commercial  or  legal  proceedings. 
It  would  probably  be  wise  to  resort  to  this  form  of  taxa- 
tion only  as  an  emergency  measure.  Two  other  branches 
of  revenue  would  complete  a  satisfactory  scheme  of 
federal  finance.  One  of  these  is  the  taxation  of  inter- 
state commerce,  which  could  be  made  very  productive. 
This  is  advocated  strongly  by  Professor  Adams.1  The 
other  is  the  taxation  of  incomes,  whenever  the  present 
constitutional  difficulties  may  be  removed  either  by 
constitutional  amendment  or  by  another  change  in  the 
attitude  of  the  Supreme  Court.  In  times  of  great  emer- 
gency both  of  these  taxes  might  be  needed  ;  but,  under 
ordinary  circumstances,  either  one  would  suffice.  If  a 
choice  is  to  be  made  between  the  two  forms  of  revenue, 

1  The  Science  of  Finance,  494-496. 


548  PRINCIPLES   OF  ECONOMICS. 

a  federal  income  tax  would,  in  the  judgment  of  the 
author,  be  decidedly  preferable.  The  bulk  of  our 
national  income  will  be  derived,  for  a  long  time  to 
come,  from  excise  and  customs  taxes,  which  cannot  be 
made  to  operate  justly,  since  expenditure  is  one  of  the 
worst  possible  tests  of  a  taxpayer's  faculty.  An  income 
tax  that  should  exempt  all  incomes  of  less  than  $600 
would  be  the  best  available  means  of  correcting  the 
inequalities  of  the  other  parts  of  our  federal  revenue 
system.  Moreover,  it  would  be  an  elastic  tax,  which 
could  be  easily  and  quickly  increased  in  cases  of  emer- 
gency. Such  a  feature  is  sadly  lacking  in  the  present 
inelastic  taxes  upon  which  the  national  government  now 
depends. 

The  worst  features  of  existing  methods  of  state  taxa- 
tion are  found  in  the  operation  of  the  general  property 
state  taxa-     tax,  which  is  productive  of  the  worst  enor- 
tion-  mities  and  demands  immediate  reform.    Ex- 

perience has  shown  conclusively  that  personal  property 
cannot  be  reached  by  this  means,  and  that  gross  under- 
valuation of  real  estate  cannot  be  prevented  so  long  as  a 
state  tax  is  apportioned  among  the  towns  and  counties 
upon  the  basis  of  the  valuations  made  by  the  local  assess- 
ors. The  only  method  of  remedying  these  evils  is  to 
abandon  the  futile  attempt  to  tax  personal  property  in 
this  way,  and  to  leave  the  taxation  of  real  estate  exclu- 
sively to  the  local  political  units.1    Personal  property  can 

1  So  far  as  t lie  fax  on  real  estate  is  concerned,  it  is  conceivable  that 
the  existing  difficulties  <>f  undervaluation  could  lie  remedied  by  creating 
Ktato  boards  of  assessors.     But  this  is  probably  a  political  impossibility. 


TAXATION  IN   THE   UNITED  STATES.  549 

be  reached  much  more  satisfactorily  by  other  methods, 
and  the  states  can  secure  sufficient  revenues  without 
the  tax  on  real  estate.  Corporation,  inheritance,  and 
license  taxes  have  already  become  important  branches 
of  state  income  ;  and  much  larger  receipts  can  be  secured 
from  these  sources.  Pennsylvania  some  years  ago  ceased 
to  tax  real  estate,  and  gave  this  resource  up  to  the  local 
authorities.  Its  revenues  are  now  derived  from  corpora- 
tion, inheritance,  and  license  taxes,  together  with  a  tax 
on  some  forms  of  personal  property.1  New  York,  Massa- 
chusetts, and  some  other  states  are  now  securing  more 
income  from  taxes  on  corporations,  inheritances,  and 
licenses  than  from  the  state  tax  on  property  ;  and  there 
is  a  growing  tendency  in  many  places  to  draw  an  in- 
creasing amount  of  revenue  from  the  three  taxes  just 
mentioned.2  It  will  be  seen  that  personal  property  is 
reached  in  a  considerable  measure  by  inheritance  and 
corporation  taxes.     Such  other  forms  of  personalty  as 

1  For  the  year  1896  the  income  of  the  state  was  derived  from  the  fol- 
lowing principal  sources  :  corporation  tax,  $6,945,000  ;  inheritance  tax, 
$925,000  J  license  taxes,  $1,379,000;  tax  on  personal  property,  $2,716,000. 

2  In  1898  New  York  received  $8,700,000  from  corporation,  inheritance, 
and  license  taxes;  and  $8,036,000  from  the  tax  on  property.  In  1896 
Massachusetts  derived  $4,329,000  from  the  first  three  taxes,  and  $1,745,000 
from  that  on  property.  In  fourteen  other  states  the  census  of  1890  showed 
that  the  receipts  from  corporation  and  license  taxes  varied  from  thirty- 
three  to  seventy-five  per  cent  of  the  total  receipts  from  all  taxes  separately 
reported.  The  inclusion  of  inheritance  taxes  would  raise  the  percentages 
in  some  cases.  Vermont  illustrates  especially  well  the  productivity  of 
corporation  taxes  in  a  state  where  there  are  located  hut  few  large  corpor- 
ate industries.  The  state  now  levies  a  tax  on  property  only  in  alternate 
years.  In  1892  and  1893  corporation  taxes  yielded  $643,476.  Daring 
this  period  only  $272,858  was  raised  by  a  state  tax  on  property,  which 
was  levied  only  in  1892.     See  Wood,  Taxation  in  Vermont. 


550  PRINCIPLES   OF  ECONOMICS. 

household  effects,  stock  in  trade,  machinery,  live  stock, 
and  farm  implements  can  be  readily  found  by  assessors, 
and  may  be  made  the  objects  of  a  special  tax.1  This 
resource  could  be  used  by  the  states,  if  it  should  be 
needed-after  the  taxation  of  real  estate  had  been  aban- 
doned ;  it  could  be  employed  by  the  local  governments  ; 
or  its  proceeds  might  be  divided  between  state  and  local 
authorities.  The  only  important  forms  of  personal 
property  that  would  not  be  reached  by  such  a  scheme  of 
taxation  as  is  above  outlined  would  be  mortgages, 
promissory  notes,  and  book  credits.  Mortgages  can  be 
found  if  rigorous  methods  of  registration  are  required  ; 
but  the  last  two  of  these  items  are  almost  certain  to 
escape  the  assessor,  and  no  attempt  should  be  made  to 
reach  them.  Under  present  conditions,  which  permit 
mortgages  to  escape  taxation  in  many  states,  it  is  cer- 
tain that  a  tax  on  mortgages  is  surely  shifted  onto  the 
borrower ;  and  is  not  a  burden  upon  the  lender.  The 
exemption  of  mortgages  from  taxation  would  surely 
result  in  a  lower  rate  of  interest  on  such  loans,  and 
would  work  no  injustice. 

Our  various  local  governments  should  derive  much 
more  revenue  than  is  secured  at  present  from  public 

Local  taxa-     franchises  and   all  other   public   privileges. 

tic-n.  There  are  many  indications  that  this  will  be 

done  in  the  near  future,  because  the  pressure  of  taxation 
has  forced  upon  the  attention  of  property  owners  the  fact 

1  For  household  effects  it  has  often  been  proposed  to  assume  that  these 
are  equivalent  to  two  or  three  times  the  rental  value  of  the  premises,  and 
to  assess  them  upon  this  basis.  This  lessens  the  inquisitorial  features  of 
the  tax. 


LITERATURE.  551 

that  valuable  franchises  are  now  given  away  without 
adequate  compensation.  The  receipts  from  such  sources 
would  supply  a  considerable  portion  of  the  revenues  re- 
quired by  our  cities.  License  taxes  arc  also  available 
for  local  purposes,  especially  those  upon  the  sale  of 
liquors,  from  which  large  receipts  already  accrue.  Other 
license  taxes  should  be  employed  with  moderation. 
What  other  revenues  might  be  needed  could  easily  be 
provided  by  the  exclusive  right  to  tax  real  estate.  In 
1890  our  state  and  local  governments  raised  $443,090,000 
by  the  taxation  of  real  and  personal  property.  Real 
property  made  up  74.4  per  cent  of  the  total  assessed 
valuation,  and  furnished  consequently  8329,500,000  of 
the  entire  receipts  from  this  tax.  It  is  evident,  there- 
fore, that  real  estate  can  supply  all  the  revenue  needed 
for  local  purposes  after  other  resources  have  been  prop- 
erly utilized.  Moreover,  local  assessors  would  be  under 
no  external  compulsion  to  undervalue  taxable  property, 
and  this  tax  could  be  assessed  much  more  equitably 
than  at  present. 


LITERATURE   ON  CHARTER  XVII. 

General  Economic  Treatises  :  Andrews,  Institutes  of  Eco- 
nomics, 218-222;  Ely,  Outlines  of  Economics,  316-372;  Hadley, 
Economics,  447-184;  Mill,  Principles  of  Political  Economy,  Bk. 
V.  (haps.  2-7;  RiCARDO,  Principles  of  Political  Economy,  Chaps. 
8-18;  Smith,  Wealth  of  Nations,  15k.  V.  ;  Walker,  Political 
Economy,  475-505. 

Treatises  on  Public  Finance:  A.DAMS,  The  Science  of  Fi- 
nance; BA8TABLE,  Public  Finance  ;  Coii.v,  The  Science  of  Finance; 


552  PRINCIPLES  OF  ECONOMICS. 

Cossa,  Taxation  ;  Daniels,  Elements  of  Public  Finance  ;  Plehn, 
Introduction  to  Public  Finance. 

Special  Treatises :  Adams,  Public  Debts  ;  Cooley,  Treatise 
on  the  Law  of  Taxation  ;  McCulloch,  Treatise  on  Taxation ; 
Ross,  Sinking  Funds;  Rosewater,  Special  Assessments;  Selig- 
man, Essays  in  Taxation ;  Seligman,  Progressive  Taxation ; 
Seligman,  The  Shifting  and  Incidence  of  Taxation ;  Walker, 
Double  Taxation ;  Wells,  Principles  of  Taxation  ;  West,  The 
Inheritance  Tax.  See  also  the  following  articles  in  Lalor's 
Cyclopaedia  of  Political  Science:  "  Budget  "  ;  "  Customs  "  ; 
"Debts";  "Excise";  "Finance";  "  Revenue,  Public " ;  "Tar- 
iffs "  ;  "  Taxation"  ;  "  Treasury  Department." 

Works  Relating  Primarily  to  American  Financial  History  : 
Adams,  Taxation  in  the  United  States,  1789-1816 ;  Bolles,  Fi- 
nancial History  of  the  United  States ;  Bryce,  The  American 
Commonwealth,  Vol.  I.  Part  II.  Chap.  43;  Durand,  The  Finances 
of  New  York  City;  Ely,  Taxation  in  American  States  and  Cities ; 
Hollander,  The  Financial  History  of  Baltimore;  Howe,  Tax- 
ation in  the  United  States  under  the  Internal  Revenue  System ; 
Kearney,  Sketch  of  American  Finances,  1789-1835 ;  Plehn, 
The  General  Property  Tax  in  California ;  Scott,  The  Repudiation 
of  State  Debts;  Taussig,  Tariff  History  of  the  United  States; 
Urdaiil,  The  Fee  System  in  the  United  States;  Wood,  History 
of  Taxation  in  Vermont ;  Worthington,  Historical  Sketch  of 
the  Finances  of  Pennsylvania.  See  also  the  article  "Finance, 
American,"  in  Lalor's  Cyclopaedia  of  Political  Science. 

References  to  Financial  Statistics :  Statistical  Abstract  of 
the  United  States;  Eleventh  Census,  Report  on  Wealth,  Debt, 
and  Taxation  ;  Annual  Reports  of  the  Secretary  of  the  Treasury; 
Seligman,  Finance  Statistics  of  American  Commonwealths. 


BIBLIOGRAPHY.  553 


BIBLIOGRAPHY. 

This  bibliography  is  limited  to  the  works  that  possess  im- 
portance for  the  general  student.  The  first  part  of  it  is 
confined  to  English  and  American  works,  or  to  translations 
from  French,  German,  and  Italian  writers. 

For  more  complete  accounts  of  economic  literature,  see 
Cossa,  Introduction  to  the  study  of  Political  Economy ; 
Bowker  and  Iles,  The  Header's  Guide  to  Economic,  Social, 
and  Political  Science. 


I.     ENGLISH   AND  AMERICAN  WORKS. 

Adams,  H.  C.     Public  Debts.     (New  York,  1887.) 
.     The  Relation  of  the  State  to  Industrial  Action.     Publica- 
tions of  American  Economic  Association.     (Baltimore,  1*S7.) 

.     Taxation  in  the  United  States,  1789-181G.     Johns  Hopkins 

University  Studies.     (Baltimore,  18S4.) 

.     The  Science  of  Finance.     (New  York,  1898.) 

Andrews,  E.  B.     Institutes  of  Economics.     (Boston,  1889.) 
Ashley,  W.  J.     Introduction  to  English  Economic  History  and 

Theory.     (New  York,  1888,  1893.) 
.     (Editor.)     Economic  Classics.     (New  York.) 

1.  Adam  Smith,  Select  Passages. 

2.  Ricardo,  Six  Chapters. 

3.  Malthus,  Selections  from  Theory  of  Population. 

4.  Mux,  England's  Treasure  by  Forraign  Trade. 

5.  Jones,  Peasant  Rents. 

6.  Schmollek,  The  Mercantile  System. 


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Roosevelt,  T.     The  Winning  of  the  West.     (New  York,  1889 

) 

Roscher,  W.     Political  Economy.     (New  York,  1878.) 

Rosewater,  V.  Cost  Statistics  of  Public  Electric  Lighting.  Pub- 
lications of  American  Statistical  Society.     (Boston,  1893.) 

.     Special    Assessments.      Columbia   University   Studies   in 

History,  Economics,  and  Public  Law.     (New  York,  1S93.) 

Ross,  E.  A.  Sinking  Funds.  Publications  of  American  Econo- 
mic Association.     (Baltimore,  1892.) 

Salmon,  D.  E.  Report  on  the  History  and  Present  Condition  of 
the  Sheep  Industry  of  the  United  States.     (Washington,  1892.) 

Sato,  S.  History  of  the  Land  Question  in  the  United  States. 
Johns  Hopkins  University  Studies.     (Baltimore,  1886.) 

Say,  J.  B.  Treatise  on  Political  Economy.  Third  American 
edition.     (Philadelphia,  1827.) 

Schaffle,  A.  The  Quintessence  of  Socialism.  Third  edition. 
(London,  1S91.) 

Schloss,  D.  F.  Methods  of  Industrial  Remuneration.  Third 
edition.    (London,  1898.) 

Schonhof,  J.     The  Economy  of  High  Wages.     (New  York,  1893.) 

.     History  of  Money  and  Prices.     (New  York,  1896.) 

Schouler,  J.  History  of  the  United  States  of  America.  (Wash- 
ington, 1880.) 

Schwab,  J.  C.  History  of  the  New  York  Property  Tax.  Publi- 
•    cations  of  American  Economic  Association.     (Baltimore,  1890.) 

Scott,  W.  A.  The  Repudiation  of  State  Debts.  (New  York, 
1893.) 

Scribner's  Statistical  Atlas  of  the  United  States.  (New  York, 
1883.) 

Scrivenor,  H.  Comprehensive  History  of  the  Iron  Trade 
Throughout  the  World.     (London,  1811.) 

Seligman,  E.  R.  A.     Essays  in  Taxation.     (New  York,  1895.) 

.  Finance  Statistics  of  American  Commonwealths.  Publica- 
tions of  American  Statistical  Association.     (Boston,  188!).) 

.  Progressive  Taxation.  Publications  of  American  Eco- 
nomic Association.     (Baltimore,  1891.) 

— — .  The  Shifting  and  Incidence  of  Taxation.  Second  edition. 
(New  York,  1899.) 


BIBLIOGRAPHY.  565 

Senior,  N.  W.     Political    Economy.     Fourth  edition.     (London 

and  Glasgow,  185S.) 
Shaler,  N.  S.     American  Highways.     (New  York,  1896.) 

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1894.) 
Shaw,  A.     Municipal  Government  in  Great  Britain.     (New  York, 

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Sidgwick,  H.     Principles  of  Political  Economy.     (London,  1883.) 

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Smart,  W.     Introduction  to  the  Theory  of  Value.     (London  and 

New  York,  1891.) 
Smith,  A.     An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth 

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Smith,  R.  M.     Emigration  and  Immigration.    (New  York,  1890.) 

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Smyth,  J.  F.  D.     A   Tour  in  the   United   States   of  America. 

(London,  1781.) 
Spahr,  C.  B.     The  Present  Distribution  of  Wealth  in  the  United 

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Speed,   T.     The    Wilderness    Road.     Filson   Club   Publications. 

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Spelling,  T.  C.     A  Treatise  on  Trusts  and  Monopolies.     (Boston, 

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Spencer,  H.     The  Man  versus  the  State.     (London,  1881.) 
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Steiner,  B.  C.      History  of  Slavery  in   Connecticut.     Johns  Hop- 
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Sumner,  W.  G.     A  History  of  Banking  in  the   United    States. 

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566  PRINCIPLES   OF  ECONOMICS. 

Sumner,  W.  G.      Andrew  Jackson.      (Boston   and    New   York, 

1882.) 

.     History  of  American  Currency.     (New  York,  1874.) 

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(New  York,  1884.) 

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Taylor,  E.  W.  C.     History  of  the   Factory   System.     (London, 

18S6.) 
Taylor,  S.     Profit  Sharing.     (London,  1884.) 
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The  Statesman's  Year  Book.      (London,  1895.) 
Thompson,  R.  E.     Social  Science  and  National  Economy.     (Phila- 
delphia, 1875) 
Thomson,  C.     Waste  by  Fire.     Forum,  September,  1886. 
Thwaites,  R.  G.     The  Colonies.     (New  York  and  London,  1891.) 
Toynbee,  A.     The  Industrial  Revolution  in  England.     (London, 

1887.) 
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of  Nebraska  Seminary  Papers.     (New  York,  1892.) 
Tucker,  George.     Progress  of  the  United  States  in  Wealth  and 

Population.     (New  York,  1813.) 


BIBLIOGRAPHY.  507 

Turner,  F.  J.     The  Character  and  Influence  of  the   Indian  Trade 

in    Wisconsin.     Johns   Hopkins    University   Studies.       (Balti- 
more, 1891.) 
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(Madison,  1891.)     Also  contained  in  Proceedings  of  American 

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TJrdahl,  T.  K.     The  Fee  System  of  the  United  States.     (Madison, 

1S9S.) 
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.     Land  and  its  rent.     (Bostou,  1883.) 

.     Money.     (New  York,  1877.) 

.     Money,  Trade,  and  Industry.     (New  York,  1889.) 

.     Political  Economy.     Third  edition.     (New  York,  1888.) 

.     The  Wages  Question.     (New  York,  1876.) 

Waltershausen,1  A.  S.  F.  von.     Die  Arbeitsverfassung  der  En- 

glischen  Kolonien  in  Nordamerika.     (Strassburg,  1S94.) 
Watson,  D.    K.     History   of   American    Coinage.     (New   York, 

1S99.) 
Webb,  S.  and  B.     The  History  of  Trade   Unionism.     (London 

and  New  York,  1894.) 

.     Industrial  Democracy.     (London,  1S97.) 

Weeden,  W.  B.     Economic  and  Social  History  of  New  England. 

(Boston  and  New  York,  1891.) 
Wells,  D.  A.     Recent  Economic  Changes.     (New  York,  1890.) 
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Science  Monthly,  Vols.  48  et  seq.     (New  York,  1895-1899.) 
West,  M.     The  Inheritance  Tax.     Columbia  University  Studies 

in  History,  Economics,  and  Public  Law.     (New  York,  1S93.) 
White,  H.     Money  and  Banking.     (Boston,  1895.) 
Whitney,  J.  D.     The  United  States.     (Boston,  1889.) 
Wieser,  F.  von.     Natural  Value.     (London  and  New  York,  1893.) 

1  This  Gorman  work  is  included  hero  since  it  is  the  only  work  of  the 
kind,  and  is  an  Important  reference  for  the  first  chapter  of  tins  book. 


568  PRINCIPLES   OF  ECONOMICS. 

Willoughby,  W.  W.  The  Xature  of  the  State.  (New  York  and 
London,  1896.) 

.      Government   and   Administration  in   the   United   States. 

Johns  Hopkins  University  Studies.     (Baltimore,  1891.) 

Wilson,  W.     The  State.     (Boston,  1889.) 

.     Division  and  Reunion.     (New  York  and  London,  1S90.) 

Winsor,  J.  (Editor.)  Narrative  and  Critical  History  of  America. 
(Boston  and  New  York,  1889.) 

Wood,  T.  A.  History  of  Taxation  in  Vermont.  Columbia  Uni- 
versity Studies  in  History,  Economics,  and  Public  Law.  (New 
York,  1893.) 

Woolsey,  T.  D.     Communism  and  Socialism.     (New  York,  1880.) 

Worthington,  T.  K.  Historical  Sketch  of  the  Finances  of  Penn- 
sylvania. Publications  of  American  Economic  Association. 
(Baltimore,  1887.) 

Wright,  C.  D.  Report  on  Industrial  Conciliation  and  Arbitration. 
(Boston,  1881.) 

.  The  Industrial  Evolution  of  the  United  States.  (Chautau- 
qua Press,  1895.) 

Wynne,  J.  H.  General  History  of  the  British  Empire  in  America. 
(London,  1770.) 

Young,  E.  Special  Report  on  the  Customs  Tariff  Legislation  of 
the  United  States.     (Washington,  1877.) 

II.     PERIODICAL   LITERATURE. 

The   following  economic  periodicals  and  series   of  mono- 
graphs are  important  for  the  student:  — 

Annals    of  the  American   Academy  of  Political  and  Socia^ 

Science.     (Philadelphia,  1890 .) 

Economic  Journal.     (London,  1891 .) 

Journal  of  Political  Economy.     (Chicago,  1892 .) 

Political  Science  Quarterly.      (New  York,  1886  .) 

Publications  of  the  American  Economic  Association.  (Balti- 
more or  New  York,  1886 . ) 

Publications  of  the  American  Statistical  Association.  (Bos- 
ton, 1S89  .) 


BIBLIOGRAPHY.  569 

Quarterly  Journal  of  Economics.     (Boston,  1887 .) 

The  following  commercial  and  financial  papers  or  journals 
are  also  of  great  value :  — 

Banker's   Magazine   and    Statistical    Register.       (Xew   York, 

1S4G .) 

Bradstreets.     A  Journal  of  Trade,  Finance,  and  Public  Economy. 

(New  York.) 
Commercial  and  Financial  Chronicle.     (New  York.) 

Economist.     (London,  1843 .) 

New  York  Journal  of  Commerce  and  Commercial  Bulletin. 

(Xew  York.) 

III.     FRENCH   AND   GERMAN"  WORKS. 

For  the  guidance  of  readers  who  may  desire  to  commence 
the  study  of  French  and  German  works  on  economics,  the 
following  references  are  suggested:  — 

I.     French  Works  on  Economics. 

Say,  J.  B.  Traite  d'Economie  Politique.  Eighth  edition.  (Paris, 
1876.)  This  work  was  translated  and  published  in  this  country 
early  in  tin;  century.  For  many  years  it  was  widely  used  and 
had  great  influence.  The  American  translation  is  referred  to 
above. 

Cherbuliez,  A.  E.  Precis  de  la  Science  Economique.  (Paris, 
18G2.)  One  of  the  best  presentations  of  French  economic 
thought  of  the  middle  of  the  century. 

Chevalier,  M.  Cours  d'Economie  Politique.  Second  edition. 
(Paris.  lSfi5.)  LaMonnaie.  (Paris,  18G6.)  Chevalier  favored 
monometallism.  One  of  his  works  has  been  translated  under 
the  title,  "  The  Probable  Fall  in  the  Value  of  Gold."  (New 
York,  1859.) 

Wolowski,  L.  De  la  Monnaie.  (Paris,  186S.)  L'Or  et  L' Argent. 
(Paris,  1870.)     Wolowski  was  an  able  bimetallist. 

Leroy-Beaulieu,  P.  Traite  de  la  Science  des  Finances.  Fifth 
edition.     (Paris,  1892.)     The  most  valuable  French  treatise  on 


570  PRINCIPLES  OF  ECONOMICS. 

public   finance,  and  one  of  the  best  in  any  language.     Traite 

d'Economie  Politique.     (Paris,  1896.)     This  is  one  of  the  most 

important  recent  works  on  economics. 
Gide,    Ch.      Principes    d'Economie    Politique.      Third    edition. 

(Paris,  1891.)     The   American    translation   of   this   work   has 

been   referred  to  constantly  in  this  book. 
Block,  M.     Les    Progres   de   la   Science  Economique  depuis  Ad. 

Smith.     (Paris,   1890.)     An   interesting    book,    the   result   of 

wide  reading,  but  sometimes  one-sided  in  its  judgments. 
Say,  L.     (Editor.)     Nouveau  Dictionnaire  d'Economie  Politique. 

(Paris,  1891-1892.)     A  valuable  work  for  reference. 

If.    German  Works  on  Economics. 

Rau,  K.  H.  Lehrbuch  der  Politischen  Oekonomie.  Eighth  edi- 
tion. (Leipzig,  1868.)  The  earliest  edition  of  this  work 
appeared  in  1826,  and  it  served  as  the  leading  text-book  in 
Germany  for  forty  years.  Rau  was,  in  a  general  way,  a  fol- 
lower of  Adam  Smith  ;  but  he  presents  in  systematic  form  the 
results  of  contemporary  investigations. 

Hildebrand,  B.  Die  Nationalukonomie  der  Gegenwart  und 
Zukuuft.  (Frankfurt,  1848.)  An  effective  and  readable  state- 
ment of  some  of  the  views  of  the  German  historical  economists. 

Knies,  K.  Die  Politische  Oekonomie  vom  Standpunkte  der  ges- 
chichtlichen  Methode.  Second  edition.  (Brunswick,  1883.) 
This  book  is  the  best  presentation  of  the  views  of  the  historical 
school,  but  the  style  is  cumbersome  and  difficult. 

Roscher,  W.     System  der  Volkswirthschaft. 

I.     Grudlagen.     Twentieth  edition.     (Stuttgart,  1892.)    For 
the  American  translation,  see  above. 

III.  Nationalbkonomik    des    Handels    und    Gewerbfleisses. 

Sixth  edition.     (Stuttgart,  1890.) 

IV.  Finanzwissenschaft.     Third  edition.      (Stuttgart,  1889.) 
All  these  works  are  mines  of  information,  but  not  so  im- 
portant from  the  point  of  view  of  economic  theory. 

Schmoller,  G.  Ueber  Einige  Grundfragen  des  Kechts  und  der 
Volkswirthschaft.  (Jena,  1S75.)  Schmoller  is  the  present 
leader  of  the  German  historical  economists.  A  portion  of  one 
of  his  works  is  translated  in  Ashley's  "  Mercantile  System." 


BIBLIOGRAPHY  571 

See  also  Schmoller's  article  on  "  Volkswirthschaft,  Volkswirth- 
schaftslehre  und  methode,"  in  Conrad's  Handwbrterbuch. 

Colin,  G.     System  der  Nationalbkonomie. 

I.  Grundlegung.  (Stuttgart,  1885.)  One  chapter  of  this 
volume  has  been  translated  under  the  title,  "  History  of 
Political  Economy."  See  above. 
II.  Finanzwissenschaft.  (Stuttgart,  1889.)  Of  this  volume 
all  *  the  chapters  but  one  have  been  translated.  See 
above. 
Both  of  these  works  are  readable  and  suggestive  rather 
than  very  profound. 

Wagner,  A.  Grundlegung  der  Politischen  Oekonomie.  Third 
edition.  (Leipzig,  1892.)  This  book  gives  a  comprehensive 
survey  of  the  fundamental  concepts  and  facts  of  economics 
from  a  juridical  point  of  view,  and  should  be  read  by  every 
thorough  student.  It  forms  the  first  volume  of  a  great  "  Lehr- 
und  llandbuch  der  Politischen  Oekonomie,"  to  which  Wagner 
has  contributed  several  important  volumes  on  public  finance. 

Menger,  C.  Grundsiitze  der  Volkswirthschaftslehre.  (Vienna, 
1871.)  This  is  a  rare  but  extremely  valuable  treatise.  Menger 
is  in  some  respects  the  leader  of  the  Austrian  school  of  econo- 
mists, lie  has  a  notable  article  entitled  "  Geld  "  in  Conrad's 
Handwbrterbuch.  Important  works  by  Bohm-Bawerk  and 
Wieser,  two  of  Menger's  pupils,  have  been  translated.  See 
above. 

Eisenhart,  H.  Geschichte  der  Nationalokonomik.  Second  edi- 
tion.    (Jena,  1891.)     A  brief  history  of  economics. 

Schonberg.  G-.  (Editor.)  llandbuch  der  Politischen  Oekonomie. 
Third  edition.  (Tubingen,  1890-1891.)  An  invaluable  collection 
of  monographs  by  eminent  economists,  covering  quite  com- 
pletely the  field  of  economic  science,  and  presenting  the  latest 
results,  especially  of  German  investigations. 

Conrad,  J.  (Editor.)  Handw.orterbuch  der  Staatswissenschaften. 
(Jena,  1890-1895.)  An  indispensable  work  of  reference  upon 
almost  all  subjects,  and  much  more  valuable  than  any  of  the 
French  or  English  dictionaries  of  political  economy. 


INDEX. 


THE   REFERENCES   ARE  TO   PAGE   NUMBERS. 


Act  of  March  14,  1900,  296. 

Act  of   1873,   relating  to   coinage, 

292;  false  charges  concerning,  292. 
Agriculture,  history  of  in  America, 

35-43 ;    extensive    cultivation    a 

feature  of  American  agriculture, 

42  ;  land  tenures  and  American 

agriculture,  41. 
American  Federation  of  Labor,  441. 
Anarchism  and  anarchists,  467,  483. 
Andrews,  E.   B.,  on  illustration  of 

the  clearing  system,  267;  on  pure 

profits,  428-429. 
Arbitration,    voluntary,     455-456 ; 

compulsory,  456-457. 
Atkinson,   E. ,  on  cotton  industry, 

70;  on  wastes  in  consumption  of 

food,  and  wastes  by  fire,  106-107. 

Banks,  and  the  check  system,  265- 
267  ;  bank  notes,  272 ;  the  de- 
posit function,  273;  the  discount 
function,  273-274;  illustration  of 
banking  functions,  274-277;  the 
issue  function,  277-278 ;  state 
banks  in  the  U.  S.,  290  ;  the  na- 
tional banking  system,  290-292. 

Banks,  savings,  important  in  pro- 
cess of  capital  formatiou,  139 ; 
statistics  of  in  U.  S.,  139. 

Barter,  disadvantages  of,  218. 

Bills  of  exchango  and  drafts,  268. 


Bimetallism,  national,  297;  and 
monometallism,  297-298  ;  inter- 
national bimetallism,  298-307  ; 
desirability  of,  299-303;  practica- 
bility of,  303-307 ;  the  experience 
of  France,  304-305;  political  ob- 
stacles to,  307. 

Birth  and  death  rates,  124-125; 
birth  rate  in  the  U.  S.,  130. 

Blacklist,  445. 

Bland- Allison  Act,  292-293. 

Bohm-Bawerk,  on  limitations  to  the 
demand  for  land,  460. 

Bonds,  government,  503-504. 

Boycotts,  445. 

Bullion  and  Money,  231-232. 

Canals,  projected  by  Washington, 
60-61;  the  Erie  Canal,  61;  other 
canals,  61;  relations  to  railways, 
61. 

Capital,  social,  as  a  factor  of  pro- 
duction, 131-141;  definition  of, 
132;  relation  to  indirect  produc- 
tion, 132;  concrete  forms  of,  133- 
134;  land  and  acquired  faculties 
are  not  capital,  135;  subsistence 
not  capital,  136;  fixed  and  circu- 
lating capital,  137;  fire  and  spe- 
cialized, 137-138;  formation  of, 
138-139;  abstinence  necessary  for 
capital    formation,   140;  induce- 


574 


INDEX. 


ments  to  saving,  140;  maintenance 
or  increase  of,  141;  an  element  in 
cost  of  production,  163-164,  200; 
importance  of  in  determination  of 
social  income,  377-378  ;  private 
or  acquisitive,  387-388;  the  value 
of  productive  capital,  388. 

Cattle  raising,  as  a  frontier  indus- 
try, 34;  in  the  colonies,  35;  in 
later  times,  35;  stock  raising  as 
a  part  of  American  agriculture, 
40-41. 

Cereals,  production  of,  35-37;  im- 
portant exports,  36. 

Clearing  house  system,  266-267. 

Coal,  production  of  in  U.  S. ,  44-55; 
concentration  of  iron  production 
in  vicinity  of  coal  supplies,  74. 

Coins  and  coinage,  defined,  223 ; 
history  of,  222-223;  free  and  gra- 
tuitous coinage,  223  ;  brassage, 
224  ;  seignorage,  224  ;  origin  of, 
224-225. 

Competition,  defined,  1 85-186;  tends 
to  equalize  price  of  goods  that  rep- 
resent the  same  cost  of  production, 
195  ;  commercial  and  industrial 
competition,  197;  is  often  imper- 
fect, 207. 

Comptroller  of  the  Currency,  290. 

Conciliation,  454-455. 

Constitutionality  of  labor  legisla- 
tion, 438-439. 

Consumption  of  Wealth,  definition 
of,  87;  consumption  and  produc- 
tion, 88;  laws  of,  88-99;  eco- 
nomic order  of,  91-95  ;  productive 
and  final  consumption,  98;  statis- 
tics of  consumption,  99-101  ; 
economy  in  consumption,  101- 
109  ;  the  law  of  demand,  1 10-113. 

Cooperation,  or  cooperative  produc- 
tion, defined,  153;  results  of, 
451-453. 


Corporations,  few  in  number  in 
England  in  1776,  54  ;  nature  of, 
143-153;  advantages  of,  150-152. 
limited  liability  of  shareholders, 
151-152;  weakness  of,  152-153. 

Cost  of  production,  social  cost,  162; 
elements  of,  162-164  ;  social  and 
employer's  cost,  198  ;  elements  of 
employer's  cost,  199-203;  differ- 
ent  costs  of  production,  203-205. 

Cotton,  production  of  in  TJ.  S.,  38- 
39 ;  importance  of  cotton  as  arti- 
cle of  export,  39. 

Cotton  industry,  developed  rapidly 
after  1807,  69;  largely  concen- 
trated in  New  England,  69  ;  rapid 
growth  in  South,  69-70 ;  charac- 
ter of,  70-71. 

Credit,  definition  of,  264;  book 
credits,  264-265 ;  promissory 
notes,  265 ;  checks,  265-267  ; 
bills  of  exchange,  267-268;  for- 
eign exchanges,  26S-272;  hanks 
as  institutious  of  credit,  273-278; 
advantages  and  disadvantages  of 
credit,  278-279;  influence  of  credit 
upon  prices,  283-285  ;  credit  lim- 
ited by  volume  of  money,  286. 

Cumberland  Road,  60. 

Custom,  and  competition,  186  ;  ob- 
scures normal  value,  209. 

Customs  taxes,  343-344  ;  see 
"Tariff." 

Demand,  the  law  of,  110-113;  a 
factor  in  determining  markel 
value,  187-188  ;  equalization  of 
international  demand,  350-851. 

Distribution  of  wealth,  375-431  ; 
the  process  of  primary  distribu- 
tion, 380-381  ;  secondary  distri- 
bution, 381-384  ;  profits,  wages, 
interest,  and  rent,  385 ;  the  law 
of  interest,  387-399 ;  the  law  of 


INDEX. 


575 


rent,  399-410  ;  the  law  of  wages, 
■110-42-1;  the  law  of  profits,  424- 
431 ;  justification  of  the  present 
distribution  of  wealth,  476. 

Division  of  occupations,  143  ;  of 
labor,  144-145. 

Dollar,  contents  of  gold,  244  ;  of  sil- 
ver, 244 ;  history  of  in  U.  S.,  288- 
289;  coinage  of  silver  dollar 
stopped,  292;  limited  silver  coin- 
age renewed,  292-293. 

Domains,  revenue  from,  498-499. 

Duties,  see  "Taxes." 

Economics,  definition  of,  79. 

Ely,  R.  T.,  on  definition  of  produc- 
tion, 115;  on  definition  of  checks, 
265;  on  limits  to  the  demand  for 
land,  460  ;  on  definition  of  social- 
ism, 464. 

Eminent  domain,  156. 

Employer,  position  of  in  distribu- 
tion, 382-384. 

Engel's  Law,  99-100. 

English  manufactures  and  com- 
merce, condition  of  in  1760,  53- 
64;  changed  by  Industrial  Revo- 
lution, 55-57. 

Entrepreneur,  see  "  Undertaker." 

Escheats,  a  source  of  public  revenue, 
502. 

Exchange  of  products,  a  form  of 
associated  activity,  146-147  ;  de- 
velopment of,  180-181;  advan- 
tages of,  181-182;  mechanism 
of,  182-183;  value,  183-216; 
foreign  exchanges,  337-373;  pri- 
mary distribution,  380-381. 

Excise,  see  "  Taxes." 

Exports  of  the  U.  S.,  337-338. 

Factors  of  production,  118-141  ; 
organization  of,  143-157 ;  coop- 
eration of,  147. 


Factory  Acts,  437-438. 

Fees,  501-502. 

Fines  and  penalties,  a  source  of  pub- 
lic revenue,  502. 

Fisheries,  early  importance  of,  43  ; 
development  of  shore  and  inland 

fisheries,  43-44  ;  U.  S.  Fish  Com- 
mission, 44. 

Flax  and  hemp,  production  of  in 
U.  S.,  38. 

Foreign  exchanges,  method  of  set- 
tling, 26S-269;  the  rate  of  ex- 
change, 270-271  ;  of  the  U.  S., 
337-338  ;  nature  of  international 
exchanges,  339-344 ;  comparative 
positions  of  England  and  the 
U.  S.,  341  ;  international  move- 
ments of  money,  342-344 ;  ad- 
vantages of  foreign  trade,  344  ; 
international  values,  344-351  ; 
immobility  of  labor  and  capital, 
344-345  ;  international  trade 
based  upon  differences  in  relative 
prices,  346-350 ;  restriction  of 
foreign  exchanges,   351-373. 

Foreign  trade  of  the  U.  S.,  337-338. 

Freedom  in  establishment  of  pro- 
ductive undertakings,  160-162. 

Freight  charges  and  the  foreign 
exchanges,  340-341;  burden  of, 
351. 

Functions  of  money,  (1)  medium 
of  exchange,  240;  (2)  value  de- 
nominator, 241  ;  (3)  standard  of 
deferred  payments,  241  ;  (4)  legal 
tender,  242. 

Fur  trade,  in  the  colonies,  33  ;  later 
history  of,  34  ;  economic  impor- 
tance of,  33. 

GEORGE,  Hknky,  proposals  for  land 

nationalization,  458-464. 
Gifts,  a  source  of  public  revenue, 

502. 


576 


INDEX. 


Gold  and  silver,  production  of  in 
U.  S.  prior  to  1848,  44;  since 
1849,  45  ;  have  displaced  other 
metals  as  money,  220-222  ; 
world's  stock  of  gold  money  and 
bars,  221 ;  conditions  of  produc- 
tion of  gold  and  silver,  237-23S  ; 
history  of  production  of  gold 
and  silver,  238-240  ;  territorial 
distribution  of,  279-282  ;  fall  in 
value  of  silver,  292-293,  297- 
298  ;  gold  and  silver  certificates, 
293-294;  increase  of  gold  pro- 
duction in  recent  years,  301-303. 

Goods,  free  and  economic,  85  ; 
economic  goods  usually  ex- 
changeable, 86  ;  durable  and 
perishable,  87  ;  present  and  fu- 
ture goods,  97. 

Governments,  did  not  originate 
money,  225  ;  hut  have  regulated 
coinage,  225-226 ;  and  have 
passed  legal-tender  laws,  226 ; 
economic  functions  performed 
by,  478-480  ;  old  views  of  gov- 
ernmental functions,  480-481  ; 
modern  thought,  481-482  ;  mod- 
ern theories  of  governmental 
functions,  482-488  ;  considera- 
tion of  the  several  functions  of 
government,  488-492. 

Government  paper  money,  257- 
263. 

Grass  and  hay  crop,  importance  of 
in  U.  S.,  37. 

Greenbacks,  or  U.  S.  notes,  263  ; 
issued  in  1862,  289  ;  history  of, 
289-290. 

Oresham's  Law,  245-247. 

Guilds,  in  England  in  eighteenth 
century,   54. 

IIadlky,  A.  T. ,  on  effect  of  large 
fixed  capitals  in  disturbing  prices, 


213  ;  on  wages,  413  ;  on  purpos 

of  labor  unions,  448. 
Hamilton,  Alexander,  on  American 

manufactures,  51-52. 
Hewitt,  A.  S.,  on  iron  industry  of 

the  U.  S.,  75  ;  on  the  obligations 

of  great  riches,  104. 
Housekeeping,  importance  of,  105  ; 

wastes  in,  105-106. 

Immigration,  statistics  of,  19-20  ; 
character  of,  20. 

Import  trade  of  the  U.  S.,  338. 

Income,  social,  375-378. 

Incomes,  private,  378-380 ;  classifi- 
cation of,  380-385. 

Indented  servitude,  22-23. 

Index  numbers,  228. 

Individualism,  484-488. 

Industrial  Revolution  in  England, 
caused  by  inventions,  55-56  ; 
marked  by  growth  of  factory 
system,  56  ;  intensified  competi- 
tion, 57. 

Industrial  Revolution  in  the  U.  S., 
57-58. 

Interest,  defined,  385 ;  social  and 
private  capital,  387-388;  value  of 
productive  capital,  388;  short  and 
long  time  loans,  388-389;  rate  of 
interest,  390-395  ;  interest  arises 
from  difference  in  value  of  present 
and  future  goods,  390-391;  risk 
and  interest,  394-395  ;  tendency 
of  rate  to  decline,  395;  rates  for 
long  and  short  loans,  396  ;  tho 
general  loan  market,  397  ;  the 
rate  of  interest  and  the  supply  of 
money,  397-398  ;  justification  of 
interest,  398;  usury  laws,  398- 
399. 

International  banking  houses,  343. 

International  payments,  339-340 ; 
various   forms    of   indebtedness, 


INDEX. 


Hi 


340-341;  indirect  payments,  341- 
342;  movements  of  money,  842- 
344. 

Investment  of  labor  ami  capital 
upon  land,  and  law  of  diminish- 
ing returns  in  agriculture,  104- 
107;  implications  of  the  law,  1(37; 
in  manufactures  and  other  indus- 
tries, 16S-170. 

Iron,  production  of  in  U.  S.,  44-46; 
iron  and  steel  industries,  74-7(5; 
growth  of  production,  75-70;  man- 
ufactures and  exports  of,  70. 

Jefferson,  Thomas,  on  slavery,  25. 

Jevons,  \Y.  8.,  on  iron  trade  in  U. 

S.,  75;  on  definition  of  coins,  223. 

Knights  ok  Labor,  440-441. 

LABOR,  scarcity  of  labor  force  in 
colonies,  22;  systems  of  in  U.  S., 
22  et  seq.;  definition  of,  121; 
different  kinds  of,  121-122;  eco- 
nomic importance  of,  123 ;  effi- 
ciency of,  123-124  ;  the  supply 
of,  124-131  ;  an  element  in  cost 
of  production,  164,  199;  a  com- 
modity, 43-2;  peculiarities  of  as  a 
commodity,  433-436;  relation  of 
to  product,  449-453. 

Labor  contract,  nature  of,  432-436; 
restriction  of  by  legislation,  437— 
439;  and  labor  organizations,  440- 
449;  industrial  warfare,  453-457. 

Labor  organizations,  two  types  of, 
4  10;  objects  of,  441-442;  desire 
collective  bargaining,  442;  strikes 
and  boycotts,  443-445; 'have  mod- 
ified the  labor  contract,  445-446; 
various  criticisms  of,  447-449. 

Lnissczfairc,  482. 

Land  nationalization,  453-464;  Land 
Tenure  Reform  Association,  458;  I 


proposals  of  Henry  George,  458- 
459  ;  Mr.  George's  arguments, 
450-462;  general  considerations, 
462-404. 

Land  tenures,  in  Europe,  14;  in  the 
U.  S.,  14-15. 

Large-scale  production,  170-171; 
secures  economy  of  capital,  172- 
174;  encourages  experimentation, 
174  ;  secures  economy  of  labor, 
174-175;  also  economy  in  subsid- 
iary processes,  175  ;  yet  certain 
advantages  attend  production  on 
smaller  scale,  175-177;  huge-scale 
production  not  necessarily  mo- 
nopoly, 177;  in  different  branches 
of  business,  177-178. 

Lassalle,  Ferdinand,  on  abstinence, 
140. 

Laveleye,  on  advantages  of  ex- 
change, 182. 

Law  of  diminishing  returns,  see 
' '  Investment  of  labor  upon  land." 

Legal  tender,  226,  242. 

Leroy-Beaulieu,  P.,  on  economy, 
102;  on  saving  and  spending,  108. 

Loans,  public,  503 ;  tbeir  forms, 
503-504;  tbeir  objects,  504-505; 
their  effects,  505. 

Loans,  short  and  long  time,  388- 
389;  supply  ami  demand,  391- 
394;  rates  for  short  and  long  time 
loans,  396. 

Lockout,  445. 

Lotteries,  public,  502. 

Lowell,  J.  R.,  on  Dred  Scott  deci- 
sion, 542. 

Lowell,  F.,  constructs  fully  equipped 
factory,  58. 

Luxury,  102-105;  does  not  "make 
trade  good,  "108-1 09. 

"  MAGIC  fund  "  delusion,  513-514. 
Manufactures,      colonial,      48-52; 


578 


INDEX. 


England's  attitude,  50,  57  ;  do- 
mestic industries,  43  ;  production 
for  markets,  49 ;  high  wages  an 
obstacle  to,  51 ;  condition  of  in 
1791,  51-52. 

Market,  defined,  184-185. 

Market  value,  186-194. 

Marshall,  A.,  upon  law  of  diminish- 
ing returns,  167  ;  upon  value,  206; 
upon  trade  morality,  215. 

Marx,  K.,  evolutionary  socialist, 
468. 

Military  expenditures,  495. 

Mill,  J.  S.,  on  relation  of  money  to 
prices,  229 ;  on  influence  of  credit 
upon  prices,  283-284;  on  value  of 
patent  rights,  428 ;  on  individu- 
alism, 485. 

Mining  industries  of  U.  S.,  44-46. 

Money,  purchasers  measure  sacri- 
fices in  terms  of,  110-111 ;  mar- 
ginal utility  of,  111 ;  development 
of  metallic  money,  218-227;  prim- 
itive money,  218-220  ;  precious 
metals  displaced  other  forms  of 
money,  220-222;  coinage,  222- 
225  ;  governments  and  money, 
225-226 ;  value  of  metallic  money, 
227-238;  supply  of  money  and 
demand  for  money,  232-235  ; 
value  of  money  and  marginal  cost 
of  production,  235-238  ;  functions 
of  money,  240-242;  debased 
money,  242-252;  inflation  and 
contraction,  252-257;  changes  in 
volume  of  money,  254-255  ;  ap- 
preciation and  interest,  255;  gov- 
ernment paper,  257-263 ;  govern- 
ment issues  in  the  U.  S.,  258  ; 
arguments  for  and  against  gov- 
ernment paper,  258-262  ;  conver- 
tible government  paper,  263-264; 
territorial  distribution  of,  279-282; 
representative  money,  283;  credit 


and  prices,  283-287 ;  money  prob- 
lem in  the  U.  S.,  295-296. 

Monometallism,  289-299. 

Monopolies,  fiscal,  305-306,  500. 

Monopoly,  is  power  to  control  sup- 
ply, 216,  309 ;  monopoly  value, 
309-312;  legal  monopolies,  313- 
314;  natural  monopolies,  314— 
316 ;  capitalistic  monopolies, 
316-318;  extent  of  monopoly 
influence,  318;  complexity  of 
monopolies,  319  ;  absolute  monop- 
oly seldom  possible,  320 ;  problem 
of  natural  monopolies,  320-324; 
growth  of  capitalistic  monopolies, 
325-328;  criminal  methods  of 
some  monopolies,  328-329  ;  final 
considerations,  329-334. 

KATiONALbanking  system,  290-292. 

Nature,  a  factor  of  production,  118— 
121;  contributions  of,  118-119  ; 
appropriability  of  natural  contri- 
butions, 119-120;  man  and  na- 
ture, 120-121. 

Non-competing  groups  among  labor- 
ers,  421. 

Normal  value,  194-209. 

Occupations,  statistics  of,  122. 

Partnership,  149. 

Pensions,  expenditures  for,  496. 

Personal     services,     are     economic 

goods,  84-86  ;  production  of,  117— 

118. 
Piece  wages,  449. 
Pools,  316-317. 

Population,  see  "Supply  of  labor." 
Population  of  the  U.  S.,   statistics 

of,  18  ;  mixed  character  of,  18,  20; 

natural  increase  of,  19 ;  mobil- 
ity of,  20-21  ;  concentration  of, 
2i-22. 


INDEX. 


579 


Precious  metals,  see  "  Gold  and 
silver." 

Price,  defined,  184;  changes  in  gen- 
eral prices,  227-228;  general  and 
individual  prices,  240  ;  credit  and 
prices,  283-287;  recent  fall  of,  299. 

Production  of  wealth,  defined,  115; 
productivity  of  various  industries, 
116  ;  production  and  sacrifice, 
116-117  ;  of  personal  services, 
117-118;  a  social  process,  143; 
stages  in  development  of,  157— 
160;  freedom  of,  160-162;  large- 
scale  production,  170-178. 

Profits,  defined,  385;  profits  and 
risks  of  investment,  424-425  ; 
necessary  profits,  425-427  ;  dif- 
ferential profits,  427-429  ;  mo- 
nopoly profits,  429-431  ;  capital- 
ization of,  430-431. 

Profit  sharing,  450-451. 

Progressive  wages,  449-450. 

Public  expenditures,  493-498  ;  their 
classification,  493  ;  in  the  United 
States,  494-496  ;  the  growth  of 
public  expenditures,  497-498. 

Public  industries,  revenue  from, 
499-501. 

Public  lands,  management  of,  15 ; 
public  domain  of  U.  S.,  15-17  ; 
policy  of  U.  S. ,  17. 

Public  revenues,  498-514  ;  from 
domains,  498-499  ;  from  public 
industries,  499-501  ;  from  fees, 
501-502  ;  from  miscellaneous 
sources,  502  ;  from  special  assess- 
ments, 502-503  ;  from  loans,  503- 
505  ;  from  taxes,  505-514. 

Railroads,  construction  of  in  U.  S., 
61-63  ;  subsidies  to,  63  ;  over- 
construction  of,  63  ;  trunk  lines, 
64 ;  competition  and  combina- 
tion, 64-65. 


Rent,  defined,  385,  399  ;  value  of 
natural  agents,  400  ;  income  from 
natural  agents,  the  rent  of  land, 
401-410 ;  rent  not  a  cause  of  high 
prices,  406-408  ;  actual  rents  and 
economic  rent,  408;  alleged  ten- 
dency of  rent  to  increase,  409-410; 
the  unearned  increment,  410, 
459. 

Rights  of  contract,  determined  and 
enforced  by  the  State,  155-157. 

Rights  of  inheritance  and  bequest, 
155. 

Rights  of  property,  defined,  154 
not  natural  rights,  155 ;  always 
limited  by  law,  155-156. 

Risks,  not  an  independent  element 
in  cost,  201,  203  ;  and  the  rate  of 
interest,  394-395. 

Roads,  in  the  colonies,  58-59;  built 
by  local  governments  in  U.  S., 
59  ;  bad  roads  of  U.  S.,  59. 

Saving  and  investment,  107-109  ; 
two  forms  of  saving,  107-108  ; 
saving  does  not  injure  trade,  108- 
109  ;  desirability  of,  109. 

Seligraan,  E.  R.  A.,  on  definition  of 
fees,  501  ;  on  definition  of  special 
assessments,  502  ;  on  the  property 
tax,  527,  533. 

Sherman  Act,  294-295. 

Shipbuilding,  early  growth  of,  65- 
66  ;  remarkable  history  of  our 
marine  until  1860,  66-67  ;  decline 
of  merchant  marine,  67-68  ;  iron 
and  steel  construction,  68  ;  illib- 
eral navigation  laws,  66-67. 

Sidgwick,  H.,  on  power  of  monopo- 
lists, 310. 

Silk  industry,  73. 

Silver,  see  "Gold  and  silver." 

Slater,  S.,  erects  cotton  mill  in 
1790,  58. 


580 


INDEX. 


Slavery  in  the  U.  S.,  origin  of,  24  ; 
the  slave  trade,  24  ;  geographical 
distribution  of,  24-25  ;  unprofit- 
able in  the  North,  25 ;  profitable 
in  the  South,  25 ;  its  effect  upon 
the  South,  26.       ■ 

Smith,  A.,  on  corporations,  54;  on 
division  of  labor,  144  ;  on  cor- 
porations, 152;  on  protective 
tariffs,  373  ;  on  causes  of  differ- 
ences in  wages,  420  ;  on  private 
enterprise,  481. 

Socialism,  defined,  464  ;  cardinal 
elements  of,  465-466  ;  ambiguous 
use  of  the  term,  466  ;  revolu- 
tionary and  evolutionary  social- 
ism, 467-468  ;  an  old  theory,  468 
-469  ;  as  a  scheme  for  production, 
469-472  ;  as  a  scheme  for  distri- 
bution, 472-474  ;  final  considera- 
•  tions,  474-476. 

Special  assessments,  502-503. 

Specific  and  ad  valorem  duties,  352, 
515. 

Stages  in  development  of  produc- 
tion, the  hunting  and  fishing 
stage,  157;  the  pastoral  stage,  158; 
the  agricultural  stage,  158-159  ; 
manufacturing  and  commercial 
stage,  159  ;  industrial  stag*1,  160. 

Stages  of  westward  expansion,  11- 
13. 

Standard  of  living,  define  d.  126  ; 
affects  growth  of  population,  127- 
129  ;  may  be  raised  or  lowered, 
127  ;  relation  of  economic  prog- 
ress to,  129;  in  the  U.  S.,  130; 
sets  limits  to  the  fall  of  wages, 
417  ;  may  be  constantly  raised, 
419. 

Standard  Oil  Company,  317,  318, 
319,  330,  333,  334. 

State,  participates  in  process  of 
production,  154-157. 


Stimson,  F.  J.,  on  the  legality  of 
strikes,  444;  on  collective  bar- 
gaining,  446. 

Strikes,  443,  448. 

Sugar  cane,  cultivation  of  in  U.  S., 
39-40. 

Supply,  defined,  188;  a  factor  in 
determining  market  value,  188— 
189;  of  labor,  435. 

Supply  of  labor,  in  relation  to  birth 
and  death  rates,  124-125;  in  rela- 
tion to  the  standard  of  living, 
126-130. 

Tabular  standard  of  value,  255. 

Tariff  on  imports,  351-352;  revenue 
tariffs,  352-353;  protective  tariffs 
in  the  U.  S.,  353-354;  detailed 
effects,  355-361 ;  different  costs  of 
production,  361;  what  protective 
tariffs  cannot  accomplish,  361- 
365;  tariffs  and  wages,  364-368; 
the  advisability  of  adopting  pro- 
tective tariffs,  368-373;  protec- 
tion to  infant  industries,  369-370; 
diversity  of  industries,  370-372; 
our  tariff  an  historical  product, 
372-373. 

Taxes,  on  monopoly  earnings,  312, 
532;  taxes  defined,  505-506;  their 
position  among  public  revenues, 
506-507;  their  justification,  507- 
508;  justice  in  taxation,  508-510; 
proportional,  progressive,  and  re- 
gressive taxes,  510-512;  direct 
and  indirect  taxes,  512-513;  cus- 
toms taxes,  343-314,  514-518; 
excise  taxes,  518-522;  taxes  on 
transactions,  522-523:  poll  or  cap- 
itation taxes,  523-524;  the  general 
property  tax,  524-533;  incidence 
of  the  property  tax,  528-532;  cor- 
poration taxes,  533-537;  license 
taxes,  537-538;  inheritance  taxes, 


INDEX. 


581 


538-541;  the  income  tax,  541-546; 

taxation    in    the    United   States, 

546-551. 
Textile   industries,    see    "  Cotton," 

"  Woolen,"  and  "Silk  industries." 
Time  wages,  449. 

Tobacco,  cultivation  of  in  U.  S.,  40. 
Treasury  notes,  503. 
Truck  payments,  438. 
Trusts,  317. 
Turner,  F.  J.,  on   the   development 

of  industries  in  the  U.  S.,  32. 

Undertaker,  definition  of  term, 
148;  functions  of,  147-148;  forms 
of  business  undertakings,  149- 
154;  single  entrepreneur  system, 
149;  position  of  in  distribution, 
382-384,  424-425;  attempt  to 
dispense  with,  452-453. 

Unearned  increment,  410,  459-464. 

Utilities,  include  material  objects 
or  personal  services,  84  ;  elemen- 
tary, place,  form,  and  time  utili- 
ties, 86;  production  of,  115. 

Utility,  definition  of,  84;  the  law 
of  diminishing  utility,  88-91; 
total  and  marginal  utility,  91  ; 
importance  of  a  good  depends 
upon  marginal  utility,  95-96. 

Value,  defined,  183-184;  the  de- 
termination of  market  value, 
186—194  ;  the  equalization  of  sup- 
ply and  demand,  189-191;  fluctu- 
ations in  market  values,  191-192; 
forced  sales,  192-193;  determina- 
tion of  normal  values,  194-209  ; 
analysis  of  cost  of  production  to 
the  employer,  1 98-203  ;  normal 
values  are  adjusted  to  the  cost  of 
production,  195-198  ;  differenl 
costs  of  production,  203-205  ; 
normal  value  depends  upon  bal 
ance    of    opposi::g    forces, 


normal  value  obscured  by  various 
causes,  209-216;  monopoly  value, 
309-312;  theory  of  international 
values,  344-351. 

Wages,  free  land  a  cause  of  high 
wages,  28  ;  evidence  of  high 
wages  in  colonial  times,  28 ; 
high  wages  in  the  U.  S.,  364- 
368  ;  defined,  385,  410;  real  and 
nominal  wages,  411 ;  wages  and 
salaries,  411  ;  time  and  piece 
wages,  412  ;  labor  cost,  412-413  ; 
wages  the  discounted  product 
of  industry,  413;  general  and 
relative  wages,  413-414  ;  general 
wages,  414-419;  limits  to  the 
increase  of  wages,  415-419;  the 
standard  of  living,  417-418;  rela- 
tive wages,  419-424. 
Wages  system,  nature  of,  432; 
freedom  of  contract,  432 ;  pecu- 
liarities of  the  commodity,  labor, 
433-436;  labor  legislation,  437- 
439  ;  labor  organizations,  440- 
449;  unfavorable  relation  of 
laborers  to  product,  449-453;  con- 
ciliation and  arbitration,  453-457. 

Walker,  F.  A.,  on  relation  of  credit 
to  prices,  285 ;  on  proposals  of 
Henry  George,  462. 

Wants,  human  wants  the  starting 
point  of  economies,  79;  origin  of, 
80-81  ;  development  of,  81  ;  cul- 
ture and  existence  wants,  82-83  ; 
satiability  of,  88. 

Waste,  in  consumption  of  food, 
105-106  ;  by  fire,  106-107- 

Water  transportation,  60. 

Wealth,  production  of,  115;  and 
progress,  129;  social  wealth,  375. 

Wilson,  Woodrow,  on  westward 
expansion,  13-14. 

W.i.  leu  industry,  71-73. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


— 


MAR 


2  o 


-  ■;  : 


OCT  01 1986 


Form  I.:i-Hi,„iii.'56(C2477s4)444 


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3  1158  00454  5587 


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A*  001  157  530  ! 


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